It's been a tough few months for Tesla (TSLA 1.55%) shareholders, as the stock has been on a downward trajectory since mid-December. Even with its recent bounce, Tesla stock is still trading down about 45% from its highs, as of this writing.
Despite the negative market sentiment of late, one fund manager remains steadfastly bullish on the stock and its prospects. Cathie Wood, who runs the Ark Invest collection of exchange-traded funds (ETFs), thinks the stock can rise nearly 10x from its current levels. She's placing a $2,600 price target on the stock and she expects it to reach that level by 2029.
Let's look to see whether investors should buy the hype.
NASDAQ: TSLA
Key Data Points
Robotaxis to the rescue?
Tesla's stock price decline has been more than just the stock getting caught up in the recent market sell-off. Tesla CEO Elon Musk has always been a polarizing figure, but his recent heavy involvement in politics and with DOGE (the Department of Government Efficiency project) has amplified the division in public sentiment about Musk to new heights.
The electric vehicle (EV) market was already seeing sales pressure, with China representing a particular weak spot due to increased domestic competition. However, the recent backlash against Musk has only exacerbated the issue. Tesla sales plummeted 49% in Europe for January and February, despite overall Europe EV sales rising by more than 28%.
In the U.S., meanwhile, Tesla users have been trading in their cars at a record rate in these past two months. Protests have erupted at Tesla dealerships, and vandalism of its cars has been on the rise. In all likelihood, Musk has alienated a large subset of potential buyers of his vehicles through his actions and statements.
Wood, in making her bullish thesis about the stock, is looking past Tesla's current issues and thinks that Tesla's robotaxi ambitions will drive the stock much higher. Tesla is the largest holding of her flagship fund Ark Innovation ETF (ARKK 2.45%), representing around 11.5% of its portfolio. Wood's Ark Innovation ETF was a pandemic darling with a huge return in 2020, but the fund has been very volatile with very mixed returns over the past few years. It turned in negative returns in both 2021 and 2022, while the fund greatly trailed the performance of the S&P 500 and Nasdaq Composite indices last year.
Wood expects about 90% of Tesla's enterprise value in 2029 to be attributed to its currently non-existent robotaxi business. She believes that Tesla will launch this business within the next two years and that there is little chance it won't be operating within the next five years.
A big part of Wood's thesis is that Tesla will initially own and operate a fleet of robotaxis, and it will keep all its revenue over the first few years. She then expects the fleet to be run by third parties where these partners will get $0.20 per mile on rides, giving Tesla 80% of the cost of a ride.
Image source: Getty Images.
Wood's thesis on Tesla is flawed
However, there are many potential issues with Wood's bullish thesis on Tesla. The first is that running a robotaxi company won't change the current backlash against Musk. Meanwhile, operating a fleet of robotaxis will first need to be done in major cities to be economical. The fact of the matter is that most major cities contain populations that tend to be politically opposed to much of what Musk advocates.
More important, though, is that Tesla is not the only robotaxi game in town. Alphabet's Waymo is years ahead of Tesla in operating a robotaxi business in the U.S. Waymo has been gaining ride-hailing market share in its initial cities and is starting to expand into other U.S. cities, as well as Tokyo, Japan.
There are also other companies still in the mix. Lyft is launching a robotaxi service in Atlanta this summer using May Mobility's autonomous technology, while General Motors is looking to get back into the game with a partnership with Nvidia. The simple fact is that with multiple robotaxi players in the space, some of the economics that Wood is banking on will erode.
Waymo and Lyft getting to the market ahead of Tesla also points to the company being behind on the autonomous driving front. Musk has a long history of overpromising and under-delivering when it comes to claims about Tesla's autonomous driving capabilities. The company has eschewed the use of lidar due to its costs in favor of camera-vision-only technology. So far, this appears to be a mistake.
I'll ignore the recent lidar versus Tesla experiment by YouTuber Mark Rober where the Tesla crashes into a Styrofoam wall while a lidar car stops, as the experiments may have some flaws. However, the vision-only technology has had a lot of issues in independent tests. This includes a recent one from AMCI Testing where drivers had to become involved over 75 times while FSD was active over a 1,000-mile test through various terrains and conditions.
As a large Tesla shareholder, Wood obviously has a vested interest in seeing Tesla's stock go up, but at this point, her price target looks like pure fantasy. With the stock's core automobile business struggling and risks surrounding its robotaxi ambitions, I'd stay on the sidelines with the stock.
