2024 has been a tumultuous year for You’re here (NASDAQ: TSLA) investors.
Over the first six months of the year, its shares have significantly underperformed S&P 500 And Nasdaq Composite Index The stock price has fallen about 20%. However, Ark Invest’s Cathie Wood, a long-time Tesla believer, recently revised her price target for the EV stock. Wood predicts that Tesla shares will hit $2,600 by 2029, up 1,082% from their recent high.
While some investors may consider such a forecast to be outlandish, I personally believe Wood may be underestimating Tesla’s prospects.
Wood’s thesis is based on robotaxis, but…
Tesla is a pioneer among electric vehicle manufacturers. After making significant progress in recent years, the company is now focused on what it sees as its next chapter: self-driving technology.
CEO Elon Musk is so convinced of the potential of autonomous driving that he said on the company’s most recent earnings call, “I recommend that anyone who doesn’t believe Tesla will solve the autonomy problem should not own Tesla stock. They should sell their Tesla stock. If you believe Tesla will solve the autonomy problem, you should buy Tesla stock.”
It’s a divisive statement, but one that’s common enough for Elon Musk. He’s not the only one who firmly believes that autonomous driving represents a huge opportunity, though.
In his latest model, Wood predicts that subscriptions to Tesla’s self-driving software, dubbed Full Self Driving (FSD), will be the main catalyst for the company’s future growth. In essence, FSD represents a high-margin, recurring revenue stream for its electric vehicle business.
Additionally, if the company ends up becoming the top developer of self-driving technology, Tesla will have a huge opportunity to disrupt areas like car rental businesses, delivery services, and ride-sharing apps.
But while I understand the opportunities FSD presents, I think Wood underestimates Tesla’s long-term potential.
…what about robotics and energy storage?
Self-driving is just an extension of the electric vehicle market. But on a deeper level, self-driving is an advanced application of artificial intelligence (AI). While Musk and his team remain committed to continuing their efforts in this area, Tesla has much bigger ambitions in the broader field of AI. In particular, the company is developing a line of humanoid robots called Optimus. The idea is to improve its efficiency and productivity by augmenting its human workforce with Optimus robots.
If this initiative proves successful, Tesla would have an incredibly lucrative opportunity to commercialize Optimus and sell robots to other companies. This could revolutionize the job market — and Wood doesn’t seem to factor that potential into his model.
The main reason Wood isn’t betting much on Optimus right now is that she believes the robots won’t be commercially available for more than five years. However, at the risk of being overly optimistic, I think Wood might want to reconsider that stance. On Tesla’s second-quarter earnings call, Musk said, “We expect to have several thousand Optimus robots in production and doing useful things by the end of next year in Tesla factories.” He also predicted that in 2026, the company would “significantly ramp up production” and sell them to external customers.
Beyond its AI initiatives, Tesla has already built a thriving energy storage business that, in my opinion, is sorely underappreciated.
The table below shows the financial results of Tesla’s energy generation and storage segment over the past several quarters.
|
Category |
Q2 2023 |
Q3 2023 |
Q4 2023 |
First quarter 2024 |
Q2 2024 |
|---|---|---|---|---|---|
|
Revenues from energy production and storage |
$1.5 billion |
$1.6 billion |
$1.4 billion |
$1.6 billion |
$3.0 billion |
|
Gross margin of energy production and storage |
18% |
24% |
22% |
25% |
25% |
Data source: Tesla.
Tesla has doubled its revenue from its energy storage business over the past year. But what’s even more impressive is that it’s delivered strong economic performance, supported by a steadily expanding gross margin.
This momentum is important because growth in the energy storage segment is helping to offset the stagnation and decline in its core business, electric vehicles. Moreover, with strong and growing earnings from its power generation unit, Tesla is still able to invest in important growth initiatives, including AI.
Let’s look at Tesla’s valuation
One thing Wall Street analysts don’t seem to agree on is Tesla’s valuation. And on the surface, I totally understand it. Its market cap is currently around $700 billion, or nearly 16 times Tesla’s. Ford and 14 times the size of General MotorsBasically, this doesn’t really hold water.
However, like Wood and Musk, I view Tesla as much more than just a carmaker. Investors need to look at the various components of its overall operation and analyze their valuations individually. This is commonly referred to as a sum-of-the-parts valuation.
Beyond its EV segment, the company is making inroads in two areas that have strong secular potential: AI and sustainable energy. Granted, it has yet to truly monetize its AI products at scale. For that reason, I understand why pessimistic investors remain skeptical. But as a long-time Tesla shareholder, I firmly believe the company will continue to make progress toward FSD. Moreover, I believe the success of FSD will drive strong demand as the company attempts to differentiate its fleet from the competition.
Furthermore, I am convinced by the case of Optimus and I share Elon Musk’s opinion that these robots will be commercialized sooner rather than later. Finally, the energy storage sector is growing faster than any other sector of the company and I do not see the demand slowing down in this area anytime soon.
It’s unclear whether the stock will hit Wood’s price target based on his forecast timeline. Over the long term, Tesla has plenty of opportunities to disrupt several markets beyond electric vehicles, and I’m optimistic about its prospects for delivering on its vision. For these reasons, I think Tesla is a solid buy for investors with a long-term time horizon.
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Adam Spatacco holds positions in Tesla. The Motley Fool holds positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
Cathie Wood Thinks This Artificial Intelligence (AI) Stock Can Soar 1,082%. Here’s Why I Think It Could Go Even Higher Than That. was originally published by The Motley Fool
