Cathie Wood is not shy about making bold predictions especially when it comes to the top holding of her flagship Ark Innovation ETF.
Wood has a history of setting lofty targets for her favorite stock, Tesla (TSLA 4.82%), which has had a difficult time recently, down 54% from its high in 2021 and about 25% lower on the year. This poor performance, meanwhile, has come while the S&P 500 has been hitting new all-time highs. Clearly, Tesla has not been along for the ride.
Let's look at Wood's latest Tesla prediction and whether there is a realistic chance of the stock hitting her target price.
New Tesla price target
Earlier this month, Wood set a $2,600 price target on Tesla to hit by 2029. She also listed a price target of $3,100 in a bullish scenario along with a bear case of $2,000.
Wood's case for her $2,600 price target largely revolves around Tesla's robotaxi business, which she predicts will account for 63% of Tesla's revenue and 86% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2029. She estimates only 26% of its revenue and 10% of its EBITDA will come from electric vehicles (EV). She models its stationary energy-storage business to be 10% of revenue and 3% of EBITDA, with insurance 1% of both revenue and EBITDA. Overall, she has the company producing $440 billion in EBITDA in 2029.
Wood assumes that Tesla will own and operate its own robotaxi fleet for the first one-to-three years it's introduced, while third-party companies will later own and maintain the vehicle fleet. Wood sees Tesla getting an 80% take rate from its fleet in 2029, with these third parties earning $0.20 per mile.
Woods said her conviction that Tesla will launch a robotaxi network within the next five years has greatly strengthened. She said this will transform the company's business model "from one-off vehicle sales to a recurring revenue base as every car becomes an AI-powered cash flow generation machine."
The portfolio manager said that Tesla's Optimus robot, which Musk has predicted could become the biggest part of Tesla, is not in her model currently and that a meaningful commercialization ramp likely won't happen in the next five years. She also does not see its supercharging network as having a meaningful impact in comparison to its robotaxi opportunity.
Without the robotaxi network, Wood said her price target would be $350.
Image source: Getty Images.
Is Wood's price target realistic?
Large price targets on a stock are often a way to grab media and investor attention and may not always be grounded in realty. For Tesla to reach Wood's price target, the stock would have to increase 14 times in value over the next five years.
However, Wood did see Tesla hit a large prior target she set in 2018 when she predicted the stock would hit $4,000 (pre-splits) by 2023. She was looking for the stock to increase 12 times over that period, and it did in fact reach her target in 2021. Adjusted for a 5-to-1 split and a later 3-to-1 split, that $4,000 price would be around $267 post-split today, so the stock has fallen back since.
At the time of her 2018 call, Tesla was dealing with quality-control issues for its Model 3, while liquidity was also a concern. However, Wood was able to see through that, and the company's fortunes changed for the better. A later $7,000 price target ($467 post-splits) by 2024 made in 2020 looks less likely to happen.
At this point, Wood is trying to model out a robotaxi network, something that currently doesn't exist. No one knows what type of reception these self-driving vehicles will be met with by commuters, nor what type of regulations they may face in major cities. Also, if competition enters the market, it could quickly change the economic dynamics as well.
As such, Wood's Tesla target, while possible, is also improbable given the number of variables involved. That said, Tesla does not have to reach Wood's target to be a successful investment over the next five years. At this point, an investment in the company is very much an investment in Tesla CEO Elon Musk and his technology vision. If he can pull off a robotaxi network or if his Optimus robots eventually become the largest part of Tesla, then the stock could have a lot of room to run.
At the same time, it's always more risky to invest in business models and products that are not yet established, so investors should size any investments accordingly.
