1 Unstoppable Stock With 990% Upside Potential, According to Ark Invest Cathie Wood

Cathie Wood is the founder and chief investment officer of Ark Invest, which manages a family of exchange-traded and private equity funds. Each fund invests in innovative technologies such as electric vehicles (EVs), robotics, space exploration, artificial intelligence (AI), and more.

Wood recently described Tesla (TSLA -2.33%) as the world’s biggest AI opportunity due to the introduction of the latest version of autonomous driving (FSD) technology, which could change the economics of the company. For the same reason, Ark also published a report in June that included a Tesla share price target of $2,600 by 2029.

That represents a 990% increase from today’s share price, which may be ambitious considering Tesla’s electric vehicle sales are currently declining. In fact, even the company’s CEO, Elon Musk, believes Ark’s goal will be difficult to achieve.

Tesla’s Core Business Hits Headwinds

Tesla is set to deliver a record 1.8 million vehicles in 2023, up 38% from a year earlier. The company declined to provide a delivery forecast for the year, but some analysts expect the number to be 2.2 million. That would be a slowdown in growth of just 22%.

Musk previously told investors that Tesla could increase EV production (and therefore deliveries) by 50% annually for the foreseeable future, which no longer seems likely. Furthermore, Tesla deliveries were down 6.5% in the first half of 2024, compared with the same period in 2023. And that’s despite the company cutting prices over the past year to support demand, which crushed its automotive gross profit margin. It was just 14.6% in the second quarter, a far cry from its 2021 peak of more than 30%. (I’ll explain why that’s important later.)

So why is Tesla struggling to sell cars? Demand for electric vehicles overall appears to be weakening. In Europe, sales fell 44% in August compared with the same month last year, and the market share of electric vehicles fell to just 14% from 21% previously. Traditional carmakers such as Ferry AND General Motors Over the past year, the company has cut planned investments in the segment by billions of dollars, citing concerns about demand.

Research conducted by Goldman Sachs suggests that consumers are concerned about the lack of fast-charging infrastructure, as well as depreciation as used EV prices plummet. In addition, high interest rates around the world have raised the cost of borrowing, so many consumers in the market for new cars may opt for cheaper gasoline-powered models.

Then there is the competitive factor. Based in China BYDfor example, it currently sells one of its EV models for less than $10,000 domestically (where Tesla has a large presence), and it could come to Europe in 2025. Tesla simply can’t compete at that price, but the company is working on an affordable model that could sell for as little as $25,000. It’s due out next year, and Tesla hopes its reputation as a premium brand will be enough to attract lower-income consumers.

FSD is key to Wood’s forecast

Tesla is a leading developer of self-driving software, and while the software hasn’t been approved for widespread use on U.S. roads, Ark’s research suggests that customers have driven 1.3 billion miles using beta versions of the technology. The latest version, 12.5, has far superior performance to 12.4, so it should be the most efficient iteration yet.

The company is expected to unveil a robotaxi called Cybercab on Oct. 10, a key part of Ark’s $2,600 price target for Tesla shares. It will be powered entirely by FSD, paving the way for new revenue streams like autonomous passenger ride-hailing (think Uber(but without a driver).

Musk wants to build a ridesharing network where Cybercabs can earn money around the clock. Tesla customers who pay for FSD will also be able to loan their vehicles to the network when they’re not using them, earning extra income (which will be split with Tesla).

Ark believes Tesla will generate a staggering $1.2 trillion in revenue in 2029, 63% ($756 billion) of which will come from its robotaxi platform. That doesn’t include potential FSD licensing deals with other automakers that appear to be in the works. That’s incredibly ambitious, considering the company is only on track to generate $98.9 billion in total revenue this year, meaning the company will need compound annual growth of 64.7% between now and 2029 to meet Ark’s forecast.

Keep in mind that Musk himself had previously forecast just 50% annual growth, and now he’s not even hitting that target. In fact, in a post on social media platform X in June, he said that meeting Ark’s forecast would be “extremely difficult.”

Achieving Arka’s target price by 2029 will be nearly impossible

So Ark’s revenue model could be a significant stretch based on the facts available today. But I want to return to Tesla’s shrinking gross profit margin that I mentioned earlier, because it’s causing the company’s earnings per share (EPS) to plummet.

Tesla generated $0.42 in earnings per share in Q2 2024, down a whopping 46% year-over-year. The company’s earnings per share for the trailing 12 months is $3.56, and with the stock price hovering around $238 at the time of writing, the company trades at a price-to-earnings (P/E) ratio of 67.

It’s more than that double P/E ratio 30.8 Nasdaq-100 index, meaning Tesla is significantly overvalued relative to its big tech peers. With Tesla’s earnings falling rapidly, it’s very hard to justify that premium.

Investors may be paying up for the stock because of opportunities like FSD and robotaxi, which, if Ark is right, could dwarf Tesla’s EV business in the coming years. But no one knows when (or if) these technologies will receive regulatory approval, so their potential financial impact on the company is not entirely relevant at this point.

That’s why I think it’s highly unlikely that Tesla stock will rise 990% and hit $2,600 by 2029, given the math. I have no doubt the company has an exciting future, but investors are exposing themselves to downside risk if they buy at the current price.