This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Cathie Wood's Ark Invest has been one of the most vocal supporters of and investors in Tesla (NASDAQ: TSLA), and it's no secret in the investing world that Ark has a $2,600 price target on the stock for 2029. Still, what does that target mean, and does Ark's reasoning make sense? Here's the lowdown.
Ark Invest's $2,600 price target
The investment company's price target won't be "right," but then again, it's not supposed to be. It's an expected case scenario produced by a Monte Carlo simulation. In other words, Ark plugged numerous variables into an algorithm and ran a vast number of computer simulations to model a range of randomized outcomes. It's not necessary to get into the weeds about how these simulations are done; suffice it to say that on the bearish side, Ark's model shows a 25% chance that Tesla's stock price will be $2,000 or less in 2029, and on the bullish side, it finds a 25% chance that it will be $3,100 or more. Roughly in the middle lies Ark's expected value of $2,600 for the shares.
The modeling itself is almost certainly wrong, simply because it relies on variables that are incredibly hard to predict.
To illustrate just how challenging it can be to make accurate stock forecasts using this kind of simulation, let's revisit the predictions Ark made in 2021 and 2023 for Tesla's share prices in 2025 and 2026, respectively.
Tesla's current stock price in 2025 is about $320.
|
Tesla Price Targets |
Ark 2021 Forecast for 2025 |
Ark 2022 Forecast for 2026 |
|---|---|---|
|
Bear case |
$1,500 |
$2,900 |
|
Bull case |
$4,000 |
$5,800 |
|
Expected value |
$3,000 |
$4,600 |
Data source: Ark Invest presentations.
Tesla's stock price is currently far below even the bearish scenario Ark simulated in 2021, and it would have to increase by 806% to hit the bear case scenario for 2026 that was projected in 2022.
All of which is not to criticize Ark, because modeling the long-term value of a speculative growth stock like Tesla is incredibly difficult. The point is not to take the targets too literally.
But if investors can't take such price targets as gospel, is there anything to be gleaned from Ark's analysis?
As a matter of fact, there is.
Where Ark's model makes sense
The key points from the model that investors can take away are the following:
- Tesla's share price is highly sensitive to the timing and scaling of its robotaxi and Full Self-Driving (FSD) capabilities.
- The $2,600 price target for 2029 assumes that at that point, 88% of Tesla's enterprise value (market cap plus net debt) will be attributable to its robotaxi business, and just 9% to its electric vehicle (EV) sales.
The message is clear: Don't buy Tesla stock unless you believe there's a good chance its robotaxi service (which may already be operating in its first market by the time you read this) won't be successful. Everything is riding on the company's robotaxi bet.
Tesla's robotaxis
Tesla's unsupervised Full Self-Driving (FSD) system is unproven, as is its robotaxi concept. Notably, it has yet to begin volume production of its dedicated robotaxi, the Cybercab. Moreover, there are myriad regulatory hurdles and safety concerns to overcome. Simply put, Tesla's robotaxi business is risky. And if it fails, it will likely set Tesla back significantly. Buyer beware.
That said, while Tesla is a speculative growth stock -- remember, buyers at this point are investing primarily for its robotaxi business, not its electric vehicle business -- it's a growth stock with a difference. Tesla continues to dominate the EV market, and rivals such as Ford Motor Company and General Motors, have withdrawn from the robotaxi race.
The auto industry as a whole has invested billions into the various efforts to develop a fully autonomous vehicle, and Tesla has not been alone in overpromising and underdelivering on it. Yet Tesla is launching its robotaxi service, and it has the vehicles, the data hoard, and the cash reserves to make it work. It's also ideally placed to start producing lower-cost EVs (which can be used as robotaxis controlled by unsupervised FSD systems), and the company says it's set to begin volume production of the Cybercab in 2026.
Where Wood might be right
Ark Invest is correct that the robotaxi business will be the key to Tesla's longer-term valuation and also the future of the auto industry. If -- and it's a big if -- Tesla can get the technology right, then there's significant upside for the stock, because all the other operational ingredients are in place for the company to make it work. That's where Wood and Ark might be right after all.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
