Ark Investment Management operates eight exchange-traded funds (ETFs) that invest in technology stocks at the forefront of innovation, from industries such as electric vehicles (EVs) to robotics to artificial intelligence (AI).

Ark is run by Cathie Wood, a seasoned investor known for her incredibly bullish calls on stocks in the tech sector. Recently, she said EV giant Tesla (TSLA 0.23%) could be the biggest AI opportunity in the world thanks to its autonomous self-driving software.

Ark just backed up her call with fresh research suggesting Tesla stock could soar to $2,600 by 2029, which represents a whopping 1,366% upside from where it trades today. Is that a realistic target? Tesla CEO Elon Musk just weighed in, so let's examine the possibilities.

tesla car at super charger station.

Image source: Tesla.

Tesla faces a series of short-term challenges

Tesla delivered a record 1.8 million EVs in 2023, but the company had to slash prices by 25.1% on average throughout the year to spur demand as consumers grappled with tough economic conditions. Plus, a 38% year-over-year increase in the deliveries number was shy of Musk's long-term target to grow sales by 50% annually.

The deceleration is likely to continue because Musk neglected to offer a deliveries forecast for 2024, leaving some analysts to predict they could grow by just 22% to 2.2 million. Tesla faces a number of headwinds, including an apparent slowdown in demand for EVs. According to data from Cox Automotive, the average price of an EV fell 9% during the first quarter of 2024 from the year-ago period, suggesting manufacturers continue to lack confidence.

Plus, competition is increasing at the lower end of the market, where China-based BYD, for example, offers an entry-level EV for under $10,000. Tesla can't compete at that price point, but it plans to launch an entry-level model of its own in 2025 that could sell for as little as $25,000. Investors might have to brace for sluggish sales until that EV hits the market.

Ark's forecast revolves around Tesla's full self-driving software

EV sales account for 81% of Tesla's total revenue at the moment, but Ark's modeling suggests they could fall to just 26% by 2029. The company believes Tesla's AI-based full self-driving (FSD) technology will be the primary source of revenue by then, through direct sales of the software and through the upcoming Cybercab (robotaxi) platform that will be unveiled in August.

Tesla's FSD technology is among the most advanced in the industry. It's still in beta mode, but customers have used the latest version 12 to drive over 300 billion real-world miles so far, giving Tesla mountains of valuable data it can use to bring the software closer to a mainstream release.

Ark says a Tesla vehicle using FSD is 16 times safer than the average car on the road, with one crash recorded every 3,200 miles, compared with one crash every 192 miles for human drivers across the U.S. That bodes well when it comes to winning regulatory approval in the future.

Tesla can monetize FSD in several ways. It can sell the software on the subscription basis to owners of Tesla EVs. It can license the FSD platform to other car manufacturers for a fee. Also, Musk intends to launch an autonomous ride-hailing network, similar to Uber except without human drivers.

If you own a Tesla with FSD, you could lend your vehicle to the ride-hailing network where it can earn income while you're not using it (and paying Tesla a cut for the privilege). However, the real money will come from the Cybercab, which could be deployed into the network by Tesla, allowing the company to keep all of the revenue for itself. Theoretically, it could also sell Cybercabs to other ride-hailing companies like Uber, helping them eliminate the large cost of human drivers.

Can Tesla stock soar 1,366% to reach $2,600?

Tesla generated $2.73 in earnings per share over the past four quarters, so based on its current stock price of $177.29, it trades at a price to earnings (P/E) ratio of 70.9. That makes it more than twice as expensive as the Nasdaq-100 technology index, which trades at a P/E ratio of 30.9. Considering Tesla's earnings shrank in the recent quarter, that premium valuation is very hard to justify, which might cap any further upside potential in the stock as things stand today.

Plus, Ark's forecast suggests Tesla will generate $1.2 trillion in total revenue in 2029. Wall Street expects the company to deliver $98.6 billion in revenue in 2024, which means it will have to grow by 64.8% annually between 2025 and 2029 to meet Ark's target. Remember, Musk himself expects Tesla to grow its vehicle sales by only 50% per year in the long run -- and it's struggling to even do that right now.

Musk commented on Ark's projections shortly after they were released. While he believes they are achievable, he does acknowledge the extreme challenge ahead:

The big unknown is how valuable technologies like FSD and the robotaxi will become over time, but there are two near-term problems. First, neither product is approved for widespread use on public roads yet, and second, there is no telling how consumers will respond when they do become available. If those products fall flat, Ark still thinks Tesla stock could rise to $350 by 2029 based on its EV business and human-driven ride-hailing.

Simply put, $2,600 doesn't appear to be a realistic target for Tesla stock within the next five years. It could get there over the longer term, but the company will have to execute flawlessly, especially when it comes to autonomous driving.