Cathie Wood Thinks This Magnificent Artificial Intelligence (AI) Stock-Split Stock Could Surge 777% | The Motley Fool (2024)

One of the most visible big-name investors on Wall Street is Ark Invest CEO Cathie Wood. Wood invests in many areas of emerging technology including artificial intelligence (AI) and genomics.

But perhaps Wood's most bullish stance revolves around electric vehicle (EV) company Tesla (TSLA 0.34%). Wood has been a longtime supporter of Tesla's eccentric CEO Elon Musk who shares his vision of the company spanning beyond EV production.

Given the company's inroads with autonomous driving and robotics, Wood recently referred to Tesla as the biggest AI play in the world. To back up her claim, Wood's research suggests that Tesla stock could grow by another 777% over the next three to four years.

Let's dig into the state of Tesla's operation and assess if Wood's price target is feasible.

Tesla's incredible run

Since its initial public offering (IPO) in 2010, Tesla's stock price has risen over 14,000%.

Cathie Wood Thinks This Magnificent Artificial Intelligence (AI) Stock-Split Stock Could Surge 777% | The Motley Fool (1)

TSLA data by YCharts

While that makes Tesla one of the best-performing stocks in recent history, the chart above illustrates that the journey has been anything but linear. While Tesla has garnered its share of institutional support from the likes of Wood and mutual fund manager Ron Baron, the company is also a favorite among retail investors. A lot of that has to do with Musk's infatuation with meme culture and his large presence on social media.

Nevertheless, despite some controversies, Musk and his team have always found a way to deliver. As such, confidence in Tesla has gradually risen and the company is now one of the world's largest enterprises by market cap.

Given this stunning growth, Tesla stock has experienced periods of more pronounced buying activity and its valuation has become overextended. To mitigate some of this, Tesla has undergone two stock splits in the last four years -- once in 2020 and another in 2022.

While stock splits do not inherently change the value of a company, seasoned investors probably understand that more investors tend to buy in after these events occur. This is usually due to a psychological perception that the stock is cheaper given its now lower share price.

As of now, Tesla's split-adjusted stock price is around $228. But with so many AI catalysts on the horizon, could Wood's forecast of $2,000 per share be reasonable?

Cathie Wood Thinks This Magnificent Artificial Intelligence (AI) Stock-Split Stock Could Surge 777% | The Motley Fool (2)

Image source: Getty Images.

What is behind Wood's assumptions?

The biggest drivers behind Wood's financial model are the number of cars Tesla will be able to produce in the future, as well as additional revenue streams for the business.

By 2027, Wood assumes that only 47% of Tesla's total revenue will be derived from EVs. This is because she believes that Tesla's progress in self-driving car technology will put it at the forefront of a new industry. More specifically, Wood believes Tesla is on the verge of launching a robotaxi fleet. The advent of robotaxis could significantly impact ride-hailing and delivery businesses alike as it represents a major cost-savings opportunity.

Furthermore, Ark's research suggests that the robotaxi business will carry much higher margins compared to Tesla's EVs given their recurring revenue. Should this be the case, Tesla could enjoy accelerated profitability and free cash flow -- which it can use to reinvest in more growth areas.

The combination of Tesla's rising EV production, industry-leading battery technology, and the potential of autonomous driving results in an estimated share price of $2,000 by 2027 in Wood's base case. Given Tesla's current share price, Wood is calling for a nearly 800% increase within the next few years.

Should you invest in Tesla stock?

Going off of Wood's forecast alone is not reason enough to believe Tesla stock has immense upside. While all eyes are on the company's self-driving capabilities, Tesla has other use cases for AI as well. Its humanoid robot, Optimus, could upend the labor market and warehouse operations.

To me, the biggest question marks revolve around when Tesla will begin commercializing these new products. Although investors occasionally get updates on Tesla's AI endeavors during earnings calls, it is not yet known how far away monetization is. These reasons make it obvious that Wood is assuming that a lot goes right for Tesla in a relatively short amount of time.

Cathie Wood Thinks This Magnificent Artificial Intelligence (AI) Stock-Split Stock Could Surge 777% | The Motley Fool (3)

TSLA PE Ratio (Forward) data by YCharts

Tesla's forward price-to-earnings (P/E) multiple of 58 is the highest among its Magnificent Sevencohorts and it's not even close. I think this is a good indication that investors are broadly more bullish on Tesla's prospects relative to other megacap tech companies. This could signal that the potential of AI is already priced into Tesla's share price -- at least to some degree.

I've held Tesla stock for years and plan to continue doing so. While her research is interesting to read, I am not overly concerned about (or overly confident in) Wood's lofty price targets. For now, I'll treat share price forecasts as speculation and instead continue monitoring Tesla's operating results and AI roadmap. Overall, I think further gains are very much in store for Tesla shareholders, and I am excited to see how AI plays an integral role in the evolution of the business.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.

As an experienced investor and enthusiast with a keen interest in emerging technologies and financial markets, I bring a wealth of knowledge to the discussion on Ark Invest CEO Cathie Wood's perspective on Tesla. Over the years, I've closely followed developments in the technology sector, especially within artificial intelligence (AI), electric vehicles (EV), and innovative companies like Tesla.

Let's break down the key concepts mentioned in the article:

  1. Cathie Wood's Bullish Stance on Tesla:

    • Investment Strategy: Wood, the CEO of Ark Invest, is known for her investments in emerging technologies, including AI and genomics. Her significant bullish stance is on Tesla, which she considers the biggest AI play in the world.
    • Growth Projection: Wood predicts that Tesla's stock could experience a remarkable growth of 777% over the next three to four years, driven by the company's advancements in autonomous driving and robotics.
  2. Tesla's Historical Performance:

    • Stock Performance: Since its IPO in 2010, Tesla's stock has seen a staggering rise of over 14,000%. The graph highlights the remarkable journey, with periods of heightened buying activity and stock splits in 2020 and 2022.
  3. Factors Influencing Tesla's Valuation:

    • Institutional and Retail Support: Tesla has gained support from both institutional investors, like Wood and Ron Baron, and retail investors. Elon Musk's engagement with meme culture and social media has contributed to the stock's popularity.
    • Stock Splits: Tesla has undergone two stock splits in the last four years, contributing to increased buying activity, though stock splits don't inherently change the company's value.
  4. Wood's Assumptions and Financial Model:

    • Future Revenue Streams: Wood's financial model relies on Tesla's ability to diversify revenue streams beyond electric vehicles. She anticipates that by 2027, only 47% of Tesla's revenue will come from EVs.
    • Robotaxi Fleet: Wood envisions Tesla launching a robotaxi fleet, driven by advancements in self-driving car technology. This business could have higher margins and contribute significantly to Tesla's profitability.
  5. Challenges and Skepticism:

    • Monetization of AI Products: The article points out that uncertainties exist regarding when Tesla will begin commercializing new AI products, such as the humanoid robot Optimus. Monetization timelines are crucial factors for investment decisions.
    • Speculative Nature: The author suggests that Wood's price targets should be viewed as speculation, and emphasizes the importance of monitoring Tesla's operating results and AI roadmap.
  6. Investment Considerations:

    • Tesla's Forward P/E Multiple: Tesla's forward price-to-earnings (P/E) multiple is highlighted as the highest among its peers, suggesting that investors are exceptionally bullish on Tesla's future prospects.
    • Investor Perspective: The author, having held Tesla stock for years, acknowledges the speculative nature of price targets but expresses optimism about further gains. The focus is on monitoring Tesla's operational results and AI strategy.

In conclusion, the article provides a comprehensive analysis of Tesla's journey, Wood's projections, and the factors influencing the company's valuation. It encourages a balanced approach, considering both the potential of AI and the uncertainties associated with Tesla's ambitious ventures.

Cathie Wood Thinks This Magnificent Artificial Intelligence (AI) Stock-Split Stock Could Surge 777% | The Motley Fool (2024)

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