Over the past decade, Ark Investment Management has carved out a niche for itself by identifying investment candidates among disruptive and emerging technologies. In the company's Big Ideas 2023 report, Ark laid out its thinking for a number of innovative fields, including robotics, 3D printing, digital wallets, and public blockchains, among others. Ark's founder, Cathie Wood, rose from obscurity by making early calls on a series of disrupters, including LinkedIn (now owned by Microsoft), Nvidia, Bitcoin, and Tesla (TSLA -1.11%).
After taking it on the chin in 2021 and 2022, the ARK Innovation ETF (ARKK 1.05%) has come roaring back, gaining roughly 68% last year, far outpacing the 24% gain of the S&P 500. Its performance was driven by impressive returns from Coinbase Global, Exact Sciences, and Shopify.
Tesla also remains one of the Ark Innovation ETF's largest holdings with a 7.8% portfolio weighting valued at roughly $668 million, but Wood believes there is much more upside potential. In one of Ark's most controversial calls, Wood suggests Tesla stock will likely rise to $2,000 by 2027, representing a potential gain for investors of 742% compared to Tesla's closing price as of this writing. Her bull case is even more ambitious, suggesting the stock soar to $2,500 per share over the coming four years, which would represent a gain of 953%. What are the chances the stock could achieve returns of that scale, and how should investors approach Tesla stock? Let's look at the evidence.
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The bull case for Tesla
There's a strong bull case for Tesla based on the company's electric vehicle (EV) business alone. The Model Y, Tesla's most popular model, was the world's best-selling car in each of the preceding four quarters and for full-year 2023, according to online industry publication CleanTechnica. This marks the first time in history an EV has topped the list, showing the strides Tesla has made in entering the mainstream.
The company produced and delivered more than 1.8 million vehicles in 2023, but it could get a boost in 2024. Inflation continues to cool, and the Federal Reserve has signaled rate cuts beginning this year.
The combination of its industry-leading position and the improving economic outlook suggests a bright future for Tesla.
The assumptions in Ark's thesis
Ark released its valuation model for Tesla in April 2023, suggesting three potential price targets by 2027:
- Bear case: $1,400, implying upside of 489%
- Base case: $2,000, implying upside of 742%
- Bull case: $2,500, implying upside of 953%
These cases are based on 41 distinct variables, but make no mistake: The biggest driver of these potential outcomes is the ability for Tesla to launch a viable autonomous ride-hailing service over the next couple of years. Wood calculates that EVs will contribute just 47% of Tesla's total revenue by 2027 with 44% from a soon-to-be-announced robotaxi service.
While it's possible that Tesla's full self-driving technology could make significant advances in the near future, the results thus far have been mixed. Musk previously predicted that Tesla would achieve full autonomy by 2023, but there's no evidence he achieved that ambitious goal.
Then, there are the vehicle sales projections in Ark's model. Wood expects Tesla to sell between 10.3 million and 20.7 million cars by 2027. This suggests sales would increase at a compound annual growth rate (CAGR) of roughly 55% for the bear case and 85% for the bull case. The latter far exceeds Tesla's published long-term production goal of 50% growth.
Finally, Ark's thesis calls for Tesla to generate revenue of between $346 billion and $528 billion by 2027. Analysts' consensus estimates are calling for Tesla to generate full-year revenue of $97.3 billion in 2023 and $117.2 billion in 2024. That's a lot of ground to make up to get to $437 billion, or the midpoint of Ark's projections. That said, if Tesla achieves its production goal of 50% growth annually -- and the company holds the line on sales prices -- it could generate revenue of nearly $493 billion by 2027, within striking distance of Ark's bull case target.
Taking all the evidence into account, it appears unlikely Tesla will live up to Ark's aggressive estimates -- at least not over the coming four years.
Will Tesla stock soar 742%?
Given the macroeconomic headwinds of the past couple of years and the lack of apparent progress on full autonomy, it doesn't seem feasible that Tesla stock will reach $2,500 any time soon. And while there's certainly the potential for Tesla stock to crest $1,400 by 2027, it doesn't seem likely -- at least based on what we know right now. However, I would submit it's merely a matter of time before Tesla surpasses these benchmarks as long as the company continues to execute.
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
There's good news, however. In early 2023, Ark declared that even without full autonomous driving or ride-hailing, it expected Tesla stock to climb to $500 by 2026. At that time, Tesla stock was priced at roughly $113. Since then, the stock has surged more than 110%. Given its current price of about $237, there's still a clear path to $500 over the coming few years.
Tesla will continue to be a battleground stock with bears pointing to its valuation, which is a fair point. The stock is currently selling for 75 times forward earnings and 6 times forward sales. While that might seem pricey, it's important to put that in the context of Tesla's stock price, which has increased roughly 970% over the past five years.
Given the increasing adoption of EVs, its industry-leading position, and the improving economic landscape, I'd suggest Tesla stock is deserving of a premium and remains a buy -- even if it doesn't reach Ark's pie-in-the-sky estimates.
