Will Tesla Stock Go Up 5X?

Cathie Wood’s ARK Invest has made a huge name for itself among investors for building large positions in high-growth tech companies over the last few years. One of the firm’s biggest bets is on Tesla (NASDAQ:TSLA). According to Wood’s projections, however, Tesla’s returns could just be getting started.

 

Accounting for a stock split that occurred since the projection was made, ARK believes that Tesla shares could be worth over $1,500 by 2026. This price would be more than five times the current trading price, giving investors massive returns over a very short period of time.

 

The question, of course, is whether this target is justified?

Wood’s analysis of Tesla hinges on three of the company’s business lines all becoming wildly successful.

 

First and foremost is Tesla’s electric vehicle manufacturing business. As the world’s largest maker of electric vehicles, Tesla is uniquely positioned to benefit from the transition away from internal combustion engines. Under ARK’s models, Tesla’s revenue from electric vehicle sales would jump from $46 billion in 2021 to $372-513 billion by 2026.

Autonomous driving technology is also factored into Wood’s analysis. Tesla has promised fully autonomous vehicles for several years, and the eventual delivery of this technology could unlock a great deal of value for the company.

 

A final extremely important component of ARK’s argument is the success of Tesla’s ride-hailing service. Although the company has yet to introduce this service, it has been planning to roll out a fleet of autonomous taxis for some time. Under Wood’s model, revenue from this business line could be as much as $486 billion by 2026. This would allow the company’s taxi service to rival its actual vehicle sales when it comes to revenue.

 

In addition to the growth of these three business lines, Wood also projects improvements in Tesla’s business fundamentals. Gross margin, for instance, is expected to double from 25 percent to 50 percent or more by 2026 in ARK’s analysis. Annual production increases also vault from just 20 percent to 50 percent or more under this model.

 

If these assumptions prove accurate, the share prices ARK expects could be reasonable. If any of these business lines underperforms or is delayed, however, it seems unlikely that ARK’s targets and timelines would be accurate.

 

The question of Tesla’s valuation is a well-known subject of debate within investment circles. In April, for example, Morningstar concluded that Tesla stock was overvalued by 50 percent or more.

 

More bullish analysts point to metrics such as the stock’s price-to-earnings-growth ratio, which compares favorably to established industrial giants within the Dow Jones Industrial Average.

 

Several traditional metrics, however, do suggest that Tesla is substantially overvalued. Tesla currently trades at 76 times its estimated forward earnings and 14 times sales. The stock’s price-to-book ratio is 25.6, suggesting that its price far exceeds its intrinsic value.

 

Collectively, the evidence indicates that Tesla is currently overvalued, though to what extent is unclear. More favorable metrics like PEG suggest that Tesla could be a better value proposition than the most bearish analysts believe. With so much growth already baked into the price, however, it’s difficult to call Tesla a bargain.

 

Due to its already high valuation, supply chain issues and a potential softening of consumer demand for new cars, most analysts have a more moderate view of Tesla in the short term. The median 12-month price target for TSLA from 36 analysts is $329.17, up 12.7 percent from the most recent price of $292. While respectable, this return is only about half of the CAGR needed to hits even ARK’s most bearish estimate by 2026.

 

As Tesla takes its place among the major automakers, returns like this could become more regular. Bullish investors have already driven the price high enough that recurring annual returns of 20 percent or more seem unlikely. Over time, however, more modest annual returns will likely still compound to reward investors.

 

Suppose, for instance, that Tesla delivered 12 percent reliably for the next four years. The final stock price would be approximately $460, less than a third of the ARK target. At that rate of return, though, Tesla would still slightly beat the S&P 500’s historical average. As such, there is ample room for Tesla to miss this target while still building wealth for its shareholders.

 

Although not impossible, ARK’s price target for Tesla seems to rely on a set of assumptions that are simply too optimistic. Delays in autonomous driving development, changes in the consumer market and supply chain constraints could all throw the company off course.

 

The ARK targets also seem to ignore the possibility that the stock is already meaningfully overvalued. If the stock is already overvalued by 50 percent or more, an eventual market correction will likely bring it down to a more reasonable range. Such a correction would increase the growth required to hit ARK’s targets.

 

Another argument against ARK’s thesis is that Tesla now faces considerable competition from other auto majors. Although Tesla does have a competitive advantage, automakers like Ford and General Motors are gradually catching up in the area of EV technology. As such, Tesla’s moat may be less protective than its pricing would suggest.

 

It’s also quite possible that Tesla would achieve Wood’s target price on a much longer timeline. Although the stock is most likely overvalued, the company still has ample room to grow. Innovations such as autonomous driving and ride-hailing services could bolster revenues and earnings, driving share prices higher. However, this process could take several years and elapse the 2026 target date laid out by ARK.

 

In this view, Tesla could still be a solid investment as a pure play on the EV market. Even if it doesn’t reach the astronomical heights suggested by Cathie Wood, Tesla’s ongoing growth has the potential to generate solid profits for shareholders. As far as gaining 400 percent by 2026, however, the odds seem to be stacked against Tesla.

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