Tesla's EV Business Faces Challenges: Tesla's electric vehicle (EV) sales are declining, but Cathie Wood and Ark Investment Management remain optimistic about the company's future prospects in other areas. Ark, which operates eight exchange-traded funds (ETFs) investing in cutting-edge technologies like EVs, robotics, and artificial intelligence (AI), sees Tesla's full self-driving (FSD) platform as a major growth driver. Wood recently described Tesla (TSLA -1.38%) as the world's biggest AI opportunity, forecasting the stock could reach $2,600 in five years, primarily due to FSD. This ambitious target implies a 1,110% increase from current levels, though even Tesla CEO Elon Musk acknowledges the challenge.
Tesla's core EV business is under pressure. Musk once promised 50% annual growth, but despite a record 2023 with over 1.8 million deliveries, growth was only 38%. In 2024, the company delivered 830,766 cars in the first half, down 6.5% from the previous year. Musk has since withdrawn sales forecasts for 2024, suggesting no growth expectations. Tesla has also cut prices significantly to boost demand, reducing prices by 25.1% in 2023 and seeing a further 9.7% year-over-year decline in Q1 2024. This has halved Tesla's gross profit margin to 14.6% in Q2, down from over 30% two years ago, with net income dropping 45% to $1.4 billion.
Demand for EVs appears to be softening due to high interest rates and economic conditions. Major competitors like General Motors and Ford are also scaling back production expansions. Additionally, China's BYD is producing low-cost EVs like the Seagull, set to enter Europe, a key market for Tesla. Tesla plans to launch a $25,000 EV next year to reignite growth.
Ark's Bullish FSD Forecast
Wood's optimistic forecast hinges on Tesla's FSD technology, which Musk discussed extensively in the Q2 earnings call, along with the Optimus humanoid robot. Ark's financial models project FSD will generate 63% of Tesla's revenue by 2029. The latest FSD version 12.5, with an AI model five times more powerful than its predecessor, is rolling out. Ark claims FSD is 16 times safer than human-driven cars, based on real-world beta testing data, potentially easing regulatory approval.
Tesla plans to monetize FSD through:
- Subscription sales to Tesla owners.
- Licensing to other automakers.
- Operating a ride-hailing network with autonomous robotaxis.
The ride-hailing network excites Ark the most, with Tesla's FSD-powered robotaxi set for an October 10 reveal. If it clears regulatory hurdles, it could provide Tesla with continuous revenue from autonomous rides with minimal operating costs.
Skepticism Over Ark's Price Target
For Tesla stock to hit $2,600, Ark estimates the company will need $1.2 trillion in annual revenue by 2029, requiring a 64.6% compound annual growth rate from the projected $99.2 billion in 2024. Given the modest 2% year-over-year growth expected in 2024, Ark's projections seem unrealistic.
Tesla's valuation is also a concern. With a trailing 12-month earnings per share of $2.34 and a stock price of $216, Tesla's price-to-earnings (P/E) ratio is 92.3, nearly triple the Nasdaq-100 index's P/E of 31.9. This premium is hard to justify as Tesla's earnings decline.
Ark's forecast assumes Tesla's robotaxi will generate $756 billion in annual revenue by 2029, but this technology is yet to be launched and faces regulatory uncertainty. Thus, the likelihood of Tesla's stock reaching $2,600 by 2029 is slim.
Investor Considerations
Tesla is an innovative company with significant potential, but investors might want to wait for a more reasonable P/E ratio aligned with the broader market before investing heavily.
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