Famed investor Cathie Wood, who heads up Ark Invest, deploys a strategy that focuses on the most disruptive and innovative businesses. Her firm's thinking is that these companies should exhibit huge growth over the long term as they create products and services that find broad adoption.

With this framework, it's not a surprise that Tesla (TSLA -1.11%) is the third-largest holding in the Ark Innovation ETF, which is Wood's flagship fund with over $9 billion in assets under management. Ark Invest is extremely bullish on the potential for electric vehicles (EV) and autonomous driving software.

But don't rush to buy this top EV stock -- which is down 49% from its peak -- just yet. You'll want to see improvements with this one thing before adding Tesla to your portfolio.

Profitability is taking a hit

Tesla deserves credit for accomplishing two major feats over the past few years. The company has posted remarkable growth in terms of both sales and unit volume. Moreover, Tesla's investments to bolster its manufacturing capabilities have resulted in profitability, something many EV rivals are far from achieving.

However, the momentum is weakening. Tesla posted just 3% revenue growth in the latest quarter (Q4 2023 ended Dec. 31). Higher interest rates make buying expensive cars less affordable for consumers. And the cutthroat competitive nature of the industry has forced Tesla to reduce prices for its vehicles numerous times. This has negatively impacted the top line.

Maybe even worse, these adverse factors are hitting Tesla's profitability. The company's operating margin declined from 16% in Q4 2022 to 8.2% in the most recent three-month period. This is just slightly better than the 6.8% margin of a legacy automaker like GM -- not an encouraging sign. Investors will want to see profitability start to improve meaningfully before they even consider buying the stock.

But it's hard to know when this will be. Ongoing price cuts, coupled with higher wages, will make things difficult.

For much of the past decade, Tesla's growth and profitability were remarkable when considering that it operated in the auto industry. Investors valued the company more like a tech stock. But recent trends show that the business is showing its true colors, particularly that it's still an automotive business. And this isn't what shareholders hoped for.

Potential for robotaxis

Nonetheless, Tesla is still considered a disruptor. At least this is what Cathie Wood and her firm believe. The thinking is that Tesla will one day be able to launch full self-driving capabilities in its vehicles. And this will turn them into a huge money maker. Musk believes the same thing, that Tesla will one day be able to launch a fleet of autonomous robotaxis that earn high-margin revenue for the company.

Research from Ark Invest estimates that by 2030, the worldwide robotaxi industry will generate $9 trillion in revenue. And Tesla is poised to be a leader. In this lofty scenario, it's easy to believe that the company's revenue and earnings will be astronomically higher than what they are currently.

Practice patience

But this seems like such a long way off. And it's hard to know if this will even happen in the first place, as the ultimate outcome is still full of uncertainty. Therefore, investors have to analyze the information that's available today to make the right decision.

I think it's best for investors who have been sitting on the sidelines and waiting to buy this massive market outperformer to not get caught up in the hype just yet. Instead, practice patience, and wait until margins show consistent signs of improvement. Then you'll know that Tesla is heading in the right direction.