Over the past several years, Ark Investment Management rose to prominence in the investing world by making bold calls on emerging and disruptive technologies. In its Big Ideas 2023 report, Ark makes the case for such innovations as public blockchains, robotics, electric vehicles (EVs), and autonomous driving platforms, and more. The investing firm's enigmatic founder, Cathie Wood, joined the ranks of Wall Street A-listers by predicting the success of early disrupters including Nvidia, Block (aka Square), and Bitcoin, among others.
After taking a beating last year, the Ark Innovation ETF has made an impressive turnaround, generating returns of 42% so far this year, more than double the gains of the S&P 500 (as of this writing). The gains were fueled by strong performances by Exact Sciences, Coinbase Global, and Shopify, but Wood believes this is just the beginning.
One of Ark's most high-profile calls involves Tesla (TSLA 1.85%), which Wood believes will probably climb to $2,000 by 2027, representing potential gains for investors of 729% compared with Tuesday's closing price. Her bull case is even more mind-boggling, calling for the stock to rise to $2,500 per share over the next three years, which would represent gains of 936%.
How likely is it that the stock will achieve gains of that magnitude, and how should investors view Tesla stock? Let's look at the evidence.
The case for Tesla
The case for Tesla is pretty straightforward. Tesla's most popular model, the Model Y, was the world's best-selling car in both the first and second quarters of 2023 -- the first EV to ever achieve that distinction, according to data from automotive industry publication GreenCars. The report cited data from 162 markets worldwide, saying Model Y sales of 427,524 increased 85% over the prior-year period, edging out previous chart-topper Toyota Corolla. Furthermore, the Tesla Model 3 rounded out the top 10.
Furthermore, a recent catalyst could spark additional sales in the U.S. In June, the Biden administration issued revised criteria making the full line of Tesla's Model 3 and Model Y vehicles eligible for the full federal EV tax credit of $7,500, in addition to any state and local tax credits. In at least 10 U.S. states, this brings the cost of these Tesla's down to a range of between $26,000 and $30,000, comparably priced with competing vehicles with internal combustion engines. The lower overall entry point will likely boost demand.
Taken together, these developments paint a compelling picture for Tesla's growing importance in the EV market.
The assumptions in Ark's thesis
Ark published its valuation model for Tesla in April 2023, suggesting three potential outcomes by 2027. The base case suggests the stock will reach $2,000 by 2027, which would represent gains of 729%. The bull case suggests that, during the same period, the stock will climb to $2,500, for gains of 936%. The bear case suggests a price of $1,400, suggesting potential upside of 480%.
The thesis is based on the number of factors, but Ark believes the potential for Tesla to launch a robotaxi business is a key driver fueling its estimates. In fact, Ark estimates that EVs will comprise just 47% of Tesla's revenue by 2027, with 44% coming from an as yet unannounced autonomous ride-hailing service.
While it's always possible that Elon Musk's company could perfect full self-driving over the next few years, progress thus far has been sketchy. The current state of this technology is more akin to an advanced driver-assistance feature and doesn't yet seem ready to pilot a fleet of robotaxis on the highways and byways.
Then, there's the vehicle sales assumptions. Tesla sold just over 1.3 million cars in 2022, and has sold roughly that same amount through the first three quarters of 2023. This suggests the company is on track to deliver roughly 1.8 million this year. For Tesla to achieve Ark's lofty goals, the company is expected to sell between 10 million and 21 million vehicles by 2027. Frankly, a five- to tenfold sales increase in as many years simply doesn't seem reasonable.
There's also a revenue component factored into Ark's thesis. Ark expects Tesla to generate revenue of between $346 billion and $528 billion by 2027. That should be viewed in the context of Tesla's 2022 revenue of $81.5 billion. Analysts' consensus estimates are calling for Tesla to generate full-year revenue of about $97 billion in 2023 and $118 billion in 2024. That leaves a wide chasm to cross to get to $437 billion, the midrange of Ark's estimate.
To be clear, it appears the economic headwinds of the past couple of years are beginning to subside. That, combined with the catalysts metioned, should rev up Tesla's sales over the next couple of years. However, if Tesla is able to achieve its stated goal of 50% growth over the coming four years -- from a starting point of $97 billion to close out 2023 -- it could foreseeably generate revenue of $491 billion by 2027, within the range of Ark's calculations.
The good news is that Tesla's growth in the coming years will likely surpass the benchmarks set out by Ark. However, barring unforeseen circumstances, it doesn't appear the stock will achieve Wood's base case -- at least not by 2027.
Will Tesla stock soar 729%?
Given the macroeconomic challenges of the past year, it doesn't seem logical that Tesla will achieve Ark's bull case of $2,500 anytime soon. The more likely scenario is that Tesla stock could exceed $1,400 -- Tesla's bear case -- by 2027, at least based on the best available evidence right now. That's not to say that Tesla won't hit Ark's base price target of $2,000. I believe it will at some point over the next 10 years.
Don't get me wrong. I'm a Tesla bull and shareholder, so I'm rooting for Musk and Company to succeed. In fact, I'd argue there's a compelling case for buying Tesla stock right now.
Removing autonomous driving & any form of ride-hail, which we believe will drive >60% of Tesla's value over the next 5 years, our 2026 price target would become roughly $500/share (post split) based on EVs alone, more than a 4X increase from current price.https://t.co/SWx3ZlQKHT
-- Tasha Keeney (@TashaARK) January 6, 2023
Early this year, Ark issued a proclamation, saying that even without autonomous driving or ride hailing, Tesla stock was destined to hit $500 by 2026. At the time if that call, Tesla stock closed at roughly $113. Since then, the stock has more than doubled, with a closing price on Tuesday of $241.20. Hitting $500 over the coming three years is much more realistic.
Of course, the elephant in the room is Tesla's valuation. While it has never been cheap, the stock is currently selling for 75 times forward earnings and 6 times forward sales -- which have risen in tandem with Tesla's surging stock price so far this year. While value investors will probably give the stock a wide berth, I'd argue it's deserving of a premium, given Tesla's industry-leading position, the rapid and growing adoption of EVs, and the improving economic climate.
Even if Tesla doesn't achieve Ark's ambitious goal, now seems like a great time to buy Tesla stock -- before the coming bull market propels the stock even higher.