With its position at the frontier of cutting-edge technology, Tesla (TSLA -0.40%) naturally aligns with the investment philosophy of Cathie Wood and her firm, Ark Invest. Known for its focus on innovative companies capable of disrupting established business models, Ark Invest holds Tesla as a substantial portion of its portfolio, accounting for over 8% of its total holdings, the most of any company.
Confidence in Tesla's-long term success stems from its prowess in the electric vehicle (EV) industry as well as its embrace of artificial intelligence (AI).
But just how high does Wood think Tesla can soar? Well, the answer lies in the results of Ark's Monte Carlo simulation conducted last year.
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Necessary background
A Monte Carlo simulation is a modeling technique used to forecast various outcomes by running multiple simulations based on different inputs. In the case of Tesla, Ark Invest conducted 1 million simulations, considering 38 inputs to create a comprehensive picture of the company's future performance by 2026. This simulation approach allows for a range of scenarios to be analyzed, including bullish, bearish, and expected valuations of Tesla shares.
It should also be noted that the simulation was conducted before Tesla's 3-for-1 stock split in August 2022 and the following breakdown adjusts the prices and results of Ark's Monte Carlo simulation to account for this stock split.
Breaking down the results
Ark Invest derived three main scenarios for Tesla's potential stock price from the simulation. The bull case projected a price of $1,900, representing the upper 75th percentile of all outcomes. On the other hand, the bear case predicted a price of $966, reflecting the lower 25th percentile. The expected scenario took the average of all outcomes and settled at a price of $1,533 per share, representing a percent change of more than 500% from today's price of about $260, which would result in a market cap of about $5 trillion.
One of the significant drivers identified across all scenarios is Tesla's prospective autonomous robotaxi business. Although not released yet, this branch of business is expected to contribute 62% of the company's value, 34% of its revenue, and more than half of its earnings before interest, taxes, depreciation, and amortization (EBITDA) in the expected scenario.
According to the simulation, the successful development and launch of the robotaxi service is crucial for Tesla's profitability and pace of growth. The timing of this launch plays a pivotal role in determining the company's success over the next five years, with earlier commercialization yielding more favorable outcomes. Results suggest commercialization of the robotaxi service is most likely to occur in 2024 or 2025.
While an autonomous robotaxi business holds vast potential, the simulation still predicts that EV production will remain a significant driver of Tesla's success. Thanks to years of continuous profitability, the simulation predicted that capital will no longer remain a bottleneck for EV manufacturing, a crucial step to mass production.
The best-case scenario envisions an astounding 1,100% increase from 2022's total sales, resulting in 17 million cars sold worldwide. The bear case for EV production, while not as high, is still encouraging as it expects Tesla to reach 10 million units, an increase of more than sevenfold based on last year's production.
Added profit drivers not included
It is worth mentioning that while not directly factored into the simulation, Ark Invest acknowledges the significant potential of Tesla's energy storage business and its advancements in AI. Tesla's energy business holds the potential to generate substantial value through its renewable energy solutions for both residential and commercial applications. However, the true profitability lies in Tesla's AI initiatives, which present even greater opportunities for the company.
Ark Invest believes that the recently unveiled AI as a service, powered by Tesla's Dojo supercomputer, which will allow companies to train their own AI models, could generate as much as $20 trillion in value by 2030. Additionally, Tesla's humanoid robot project, Optimus, has the potential to revolutionize various industries by replacing humans operating repetitive or dangerous tasks.
It is essential to note that the Monte Carlo simulations are speculative and clearly have limitations. However, the simulations provide valuable insights into the significant growth possibilities for Tesla. Considering the advancements in artificial intelligence and Tesla's position as the only profitable EV manufacturer, the company has substantial room for growth.
