Cathie Wood of ARK Investment Management is known for her advanced technology investing. Recently, both Wood and Musk have publicly shared their strong margin sentiments that could produce massive upside for Tesla Inc. (TSLA, Financial). I own Tesla stock at about a 5% weighting in my portfolio. I have a strong belief in the vision, strategy, and leadership of the company. While I'm not as focused as Wood on future-oriented technology, I predict a strong position for Tesla in decades to come, primarily based on their Software as a Service (SaaS), AI-integrated margin expansion. That should put them in a league of their own against other traditional car manufacturers.
ARK Invest and Tesla
The Ark Innovation ETF (ARKK) is Cathie Wood's most popular and largest investment fund. The four top holdings in order of magnitude are Coinbase Global Inc. (COIN), Roku Inc. (ROKU), Telsa, and Zoom Video Communications Inc. (ZOOM). Telsa has a weighting of 8.19%.
According to a report on ARK Invest's website, ARK's expected value for Tesla in 2027 is $2,000 per share. With the current share price of around $215, her expected upside seems overly optimistic to many, including myself at first glance. It's also worth noting that in a similar April 2022 report, ARK predicted a value of $4,600 per share in 2026.
Both reports stress the major upside warranted by AI-as-a-service, most notably in the form of robotaxi revenue.
Tesla is transforming the automotive industry
In a recent interview by David Faber for CNBC Elon Musk mentioned that an ‘automated taxi' service run on a revenue share basis of 50/50 or 70/30 in favor of the vehicle owner could create a long-term high-margin revenue stream on top of any car sale profit. This is one example where I see evidence that Tesla can particularly shine in the AI age.
Tesla's net margins are currently 11.24%. SaaS integration could feasibly affect net margins so much that I analyze it could position Tesla as the highest-margin automotive company on the planet. The only competition in the industry would be other mimicking AI car companies. I agree with Wood that Tesla can hold a large market share in robotaxis, securing a long-term moated revenue stream from highly advanced and difficult-to-copy products.
If we look at Tesla's income statement from FY 2022, we can see just how heavy the cost of goods sold element weighs on the company's overall profit potential.
However, when compared to industry competitors in the ordinary automotive industry, like Toyota Motor Corp (TM, Financial) who currently have net margins of 9.34%, or Ford Motor Co (F) who have net margins of 3.54%, Tesla does exceptionally well. Even when I compare Tesla to BYD Co LTD (OTCPK:BYDDY), a leading Chinese competitor, Tesla wins by miles. BYD's net margins are currently 4.96%. I find it prudent to also compare Tesla to Ferrari NV (RACE, Financial), which is by miles better than all automotive companies on margins, including Tesla. Ferrari's net margins are a massive 20.27%, from a gross margin of 49.39%.
What this margin peer analysis reveals to me is that Tesla is currently placed somewhere between top-class luxury and ordinary automotive. Except that isn't quite right. Due to Tesla's forward focus on AI and its advanced robotaxi initiative, the company is positioned to create an automotive segment unlike any other. Margins could perhaps defy even Farrari's once the AI initiatives are fully operational.
Tesla's risks are outweighed by long-term strategy
While carefully incorporating Tesla's forward-looking software play into valuation, I think the company is grossly mispriced at current. The GF Value chart also shows this to be the case. In my opinion, the chart is a largely accurate depiction of a current opportunity, especially when considering Tesla's long-term strategy related to AI.
That being said, there are immediate risks to be understood when I'm considering increasing my investment in Tesla. The most evident of these is that the robotaxi initiative, whilst already in the car purchase terms and conditions, is not an absolute at this stage. It is a likely integration, however.
My other major area of concern relates to robotaxi competition. Cathie Wood recently told Lauren Rublin of Barron's that her firm is beginning to believe Tesla could have up to 25% of the total auto market due to autonomous driving. However, other companies already have advantages in the space she believes will set them apart.
For example, Waymo and Cruise have limited regulatory approval for fully driverless services in areas including Phoenix and San Francisco. Tesla currently does not have the same regulatory approval. A similar advantage relates to the operational experience of both Waymo and Cruise in comparison to Tesla.
ARK Invest has also made a statement that Tesla could delay its robotaxi initiative until up to 2030, although this is unlikely.
In the interim, Tesla's gross margins could be significantly better. It's Tesla's AI initiatives that could be the defining factor for the company in breaching a new chapter of high gross margins and stellar operating margins that attract a new wave of investors keen to capitalize on AI driving. As a private investor, I do see owning Tesla shares now as a shrewd long-term bet on driverless and AI in automotive. I posit high price returns if the robotaxi initiative, for example, is executed successfully.
Similarly to the GF Value chart, which astutely outlines the current undervaluation of Tesla, the price chart of Tesla further outlines the around -47% below-high opportunity investors are presently faced with.
Analysis of current price decline
Bill Zettler recently analyzed crashes on autopilot, seat belt recalls, and phantom braking as examples of Tesla's recent operational difficulties. These setbacks are made further difficult by an incredibly high PE ratio when compared to peers. For example, Tesla's forward PE ratio is around 60. Ferrari's is around 40 and Toyota's is around 10.
There's something to be said for Tesla's overvaluation based on traditional valuation measures such as PE ratio. However, given the growth and financial strength scores (8 and 9 respectively) as exhibited by GuruFocus, I'm confident as an investor that given its advanced innovation strategies, Tesla can continue to be an appealing long-term growth investment warranting a higher price multiple.
Tesla has also faced recent market competition in EVs. It is becoming more challenging for the company to be the dominant leader in this space. BYD is getting significantly closer to Tesla with a 16.2% market share as opposed to Tesla's 21.7%, according to Electrek. Additionally, Volkswagen AG (BUD:VOLKSWAGEN) is securing European battery electric vehicle (BEV) market leadership with a 59% European market share in BEVs as of Q3 2023 according to InsideEVs.
In addition, according to The Street and multiple other sources, Musk and Wood have noted that the highly anticipated Cybertruck is likely not to be profitable for up to 18 months. This relates to scaling issues with manufacturing the trucks and has caused Wood to expect near-term volatility in Tesla's stock price.
All of the above information provides a significant risk landscape for Tesla to contend with, and I do envision the growth of Tesla shares to be on the whole a slower uphill climb until its robotaxi initiative and other advanced AI mechanics take center stage.
Conclusion
I see evidence that Tesla will continue to be a leader in automotive design. Where it once had the EV initiative, it will soon have the AI initiative. I posit that this will place the company in a stronger and more innovative position than its rivals, including most other EV companies, who will be playing catch up in a similar way to how they have with Tesla's EV dominance in the past. I'm keeping a watchful eye on Tesla's operational readiness on robotaxis and will consider increasing my portfolio weight from 5% to up to 10% as evidence becomes clearer that such a strategy will roll out successfully soon.
