Last year, a group of the world’s largest technology stocks delivered an average return of 112%, far exceeding last year’s return of 24% S&P 500 Index. They were called the “Magnificent Seven.” The group includes:
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Nvidia
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Metaplatforms
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Apple
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Microsoft
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alphabet
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Amazon
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Tesla (NASDAQ:TSLA)
However, some of these stocks don’t look so great in 2024. Tesla is the worst performer of all, posting a year-to-date loss of more than 40% as of last week. However, the stock recovered somewhat following the release of financial results for the first quarter (ended March 31), in which CEO Elon Musk highlighted a number of growth initiatives that the electric vehicle (EV) giant planned to pursue.
Cathie Wood, head of Ark Investment Management, is one of the most bullish voices on Wall Street when it comes to Tesla. She called it the “biggest artificial intelligence (AI) opportunity in the world” and reiterated Ark’s $2,000 price target for the stock in a recent interview on CNBC.
If Wood and her team at Ark are right, investors who buy Tesla shares today could make a whopping 1,234% gain. However, there are some glaring caveats.
Tesla is facing a very difficult year
In recent years, Elon Musk has reiterated Tesla’s goal of increasing electric vehicle deliveries by 50% annually for the foreseeable future. However, the company’s record-breaking 1.8 million deliveries in 2023 represented just 38% growth. Tesla has cut prices by over 25% throughout the year to stimulate demand as consumers cope with cost of living pressures had to fight.
2024 could be even more challenging. Musk’s 50% growth forecast was missing from Tesla’s last two quarterly reports, and he hasn’t provided any guidance for 2024 other than to say he expects deliveries to rise 20% compared to 2023.
There was a time when Tesla couldn’t keep up with demand, but after the company built up production capacity of more than 2.3 million units per year, it appears that consumers are shying away from electric vehicles as a whole. Older car manufacturers like Ford Motor Company And General Motors recently cut billions of dollars in planned investments in its electric vehicle business, citing weak demand and ongoing price wars.
Speaking of which: Tesla is facing growing competition not only from these established brands, but also from Chinese manufacturers like BYD, who can afford to sell vehicles at a fraction of the price due to lower production costs. To combat this threat, Tesla has announced plans to begin producing an affordable electric vehicle this year that could be priced as low as $25,000.
Cathie Wood’s forecast takes into account more than just electric vehicle sales
Musk believes Tesla should be viewed as an AI and robotics company rather than a car company because it develops everything from autonomous software to humanoid robots. The company recently launched version 12 of its FSD (Full Self-Driving) software, which allows Tesla vehicles to drive autonomously – although the company is still in beta mode, so human oversight is required.
The company plans to unveil a fully autonomous robotaxi called Cybercab in August. This long-awaited platform forms the basis of Cathie Wood’s $2,000 price target for Tesla stock. Musk plans to build a complete ride-hailing network at Tesla Aboveexcept that the cybercab could operate 24/7, creating a new revenue stream for Tesla with very high profit margins.
Existing Tesla customers with FSD-enabled vehicles can monetize them even when not in use by renting them to the ride-hailing network.
These customers pay a monthly subscription fee of $99 for FSD, which could become a highly profitable revenue stream for Tesla alone since software can be developed once and sold an unlimited number of times. The company is also considering licensing FSD software to other automakers, which represents another opportunity.
Is Cathie Wood’s $2,000 price target realistic?
Ark’s financial models predict Tesla will generate $1 trillion in annual revenue by 2027, giving the company a value of $6.1 trillion (equivalent to $2,000 per share). Considering Tesla only generated $96.7 billion in revenue in 2023, the company would need to grow a whopping 80% every year through 2027 to meet Ark’s forecast.
Actually Tesla’s sales fell up 9% year-over-year in the first quarter of 2024, which is not a good start. But even Musk’s previous forecast of 50% annual growth for electric vehicle shipments (which he abandoned) doesn’t come close.
Ark expects 44% of Tesla’s revenue to come from the robotaxi in 2027 – in other words, the company expects this brand new platform to grow from zero today to potentially over $400 billion within the next four years. Dollar will rise. This sounds completely unrealistic when you consider that the FSD software has not yet even cleared the necessary regulatory hurdles and is therefore not yet generally available.
Tesla shares are currently trading 60% below their all-time high. The company’s earnings per share shrank 47% in the first quarter, driven by price cuts that squeezed its gross profit margin. If this trend continues, the stock’s upside potential will be limited in the short term.
Based on Tesla’s trailing 12-month earnings of $2.73 and the current share price of $162.13, the company trades at a price-to-earnings (P/E) ratio of 59.4. That’s twice as expensive as the P/E ratio of 29.7 Nasdaq-100 Technology Index. That doesn’t seem like a good value considering Tesla’s sales and profits are currently shrinking.
Could Tesla stock rise 1,234% to $2,000 one day? It’s possible, but some things need to go right, and it certainly doesn’t seem likely that it will happen within Ark’s planned time frame.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, BYD, Meta Platforms, Microsoft, Nvidia, Tesla and Uber Technologies. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors, long January 2026 $395 calls on Microsoft, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
1 ‘Magnificent Seven’ Stock Up 1,234%, According to Cathie Wood was originally published by The Motley Fool