In the global world of investing, the opinions of well respected people do matter. For example, Warren Buffett is someone that people who don’t even know much about finance have heard of. The legendary investor is one of a few people who actually carry weight behind their forecasts. Cathie Wood is another person in this regard. She’s the founder and CEO of ARK Investment Management, and recently came out and said Tesla (NASDAQ:TSLA) shares could hit $3,000 by 2025. So what do I make of this?
Is it unrealistic?
I’m certainly not in the bucket of legendary investors. At the same time, I do like to think my musings are akin to the man in the street, so I’ll spell it out. Tesla shares trade around the $600 mark. So $3,000 represents a 400% return in four years. From that standpoint, the figure doesn’t look too stretched.
Tesla shares achieved over a 400% return in 2020 alone. There were several reasons behind this surge. The major one in my opinion was the flip to profitability that we saw in 2020. It produced 509,737 vehicles in the full year, with a GAAP net income of $721m. When I compare this to 370,232 cars produced in 2019 which led to a loss of $862m, it looks like the company has flipped to profitability due to the scale now reached.
Another reason Tesla shares rallied last year (and could rally onwards), is the stock’s inclusion in the S&P 500. This means that funds that track the index have to buy Tesla shares from now on. These funds hold billions of dollars, so this will always offer a boost to the share price on inclusion.
From Cathie Wood’s perspective, she sees the outlook as bright. She pins the growth mostly on the continued development and rollout of autonomous driving cars. Also, the potential growth of Tesla’s insurance arm is an area that could be profitable, according to Wood.
Why Tesla shares might not reach $3,000
On the flipside, there are valid reasons why Cathie Wood might be wrong going forward. The growth in 2020 was impressive, but it’s harder to grow at such a pace as a company gets larger. The same applies to the share price. As the market valuation grows, it’s harder to justify such a high share price.
I don’t know how many shares Tesla will have outstanding in 2025, but using some rough maths, it could put the company at a value of $3trn. This would easily put it as the most valuable company in the world by some margin. From a sanity point of view, I don’t think this makes sense.
Other companies generate significantly higher profits with lower valuations. That’s why I wrote recently about why I’m looking to buy Amazon shares. Net income in Q4 2020 alone was $7.2bn. This makes the Tesla profit look tiny in comparison.
Overall, I don’t agree with Cathie Wood on her opinion with Tesla shares. I do think it’s a good investment and would look to allocate some money there as it’s now profitable, but I don’t think $3,000 is achievable. So Tesla isn’t for me.
