Could Tesla stock really increase another 1,420% this decade?

Christopher Ruane looks at a recent price target for Tesla stock and explains how well he thinks the company may do in coming years.

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Might Tesla (NASDAQ: TSLA) be on course to become an $8trn company? The US ETF Ark Innovation thinks so. This month it set a price target for Tesla stock of $2,600 by 2029. That would mean the carmaker’s shares moving up by over 1,400% over the next five or so years.

With over $6bn of assets under management, Ark is not some little-known investor with no track record. It has been a bullish investor in Tesla for years already.

Ark has had some notable successes. It bought Nvidia stock at around $4 in 2013 and sold it at around 100 times that price last year (since when it has more than tripled).

So, could Ark be right about Tesla stock – and should I add some to my portfolio?

A lot riding on robotaxis

The main part of Ark’s 2029 price target for Tesla rides on the prospect of the company launching driverless taxis it calls robotaxis. Indeed, Ark sees nearly 90% of Tesla’s enterprise value and earnings by then coming from robotaxis.

That is the main driver behind Ark’s expectation that Tesla’s revenues and profits will surge over the coming years.

Taxis are big business. But after years pioneering a role in the space, Uber has a market capitalisation of less than $150bn. That is a lot – but it is nowhere near the $8trn foreseen by Ark for Tesla.

Tesla has been talking about robotaxis for years and the model still has not been proven (or even launched). The company suggests that its self-driving software could allow Tesla owners to utilise their cars in down times the way some property owners do through Airbnb. But I expect a lot of car owners will not want their vehicles to be hired by strangers.

The regulatory environment around taxis is a minefield, as Uber’s experience has shown. Whatever happens to Tesla’s robotaxi idea, I would be very surprised if it is a profitable enough business just five years from now to justify trillions of dollars being added to the firm’s market capitalisation.

Strong potential, but a tough environment

That does not mean I am not upbeat about the outlook for Tesla. Robotaxis may take longer to materialise at scale than expected and the financial model remains unproven. However, I do think it could be very big business (though one that some rivals may also be able to deliver).

The electric vehicle market is facing pricing pressure, risking lower profit margins. In the longer term, though, that could be good news for the large players including Tesla. The company’s sales are large although deliveries in the first quarter were 9% lower than in the prior year period, possibly a sign of growing competitive pressure.

Meanwhile, the company’s energy storage business is doing well and the first quarter saw a record deployment of its products.

So while it is doing well in many ways, the business also faces notable risks. I cannot imagine it meriting an $8trn market capitalisation by 2029 unless there is a step change in the business. I doubt that will be provided by robotaxis any time soon.

Tesla stock’s current price-to-earnings ratio of 47 is too rich for my tastes so I have no plans to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Airbnb, Nvidia, Tesla, and Uber Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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