ARK Invest recently updated its prediction for Tesla’s stock price for 2025. Its base case now sits at $3,000. And today, Tesla shares come in close to $700… so they’d have to climb well above 300% to reach that price target. And keep in mind, this is after a huge runup that’s already happened in the last year.
Tesla would go from a $650 billion business today to $2.9 trillion in less than five years. And as you’ll soon see, it gets even more ridiculous.
Now, do I think this is possible? Sure. We’ve seen many valuations stretched very far in this wild market. Also, I’m a huge fan of what Tesla and Elon Musk are doing. But do I think this price target is probable? No. At least not within the next five years.
And as a rational investor, even though I think Tesla is a great company, I think this price target is not, as well as its current price.
Of course, ARK Invest’s analysts are entitled to their own opinions, as am I… but I think it’s gotten out of hand. It’s also good to consider that Ark Invest is probably trying to get more media coverage, as well as investors to their funds. So, I take these wild predictions with a grain of salt. And in this video, I’m going to take a pragmatic, unbiased approach and hopefully help put things in perspective.
On the higher end, ARK Invest thinks there’s a 25% probability that Tesla could be worth $4,000 or more per share in 2025. That would put Tesla’s market cap at around $3.8 trillion. Here’s the expected value, as well as bear and bull cases for Tesla’s share price in 2025…
|Price Target||Market Cap|
|Expected Value||$3,000||$2.9 Trillion|
|Bear Case||$1,500||$1.4 Trillion|
|Bull Case||$4,000||$3.8 Trillion|
I calculated these market caps assuming Tesla’s total shares outstanding of 960 million doesn’t change. Although, that’s unlikely based on past trends…
Here’s the increase in shares outstanding over the past five years…
If you bought shares of Tesla a few years back and haven’t added to the position, your percentage of ownership in the company has gone down. And that isn’t necessarily a bad thing.
Also, if you’re looking closely at these numbers, they come in slightly higher than what Tesla reports as shares outstanding. That’s because this chart factors in potentially dilutive agreements. On top of that, it’s adjusted for the stock split.
So, shares outstanding have steadily climbed over the past five years and are up well over 60%. But will this continue? Let’s use this trend and other recent history as a guide…
Elon Musk in the January 30, 2020 earnings call said it didn’t make sense to raise money because they expected to generate enough cash. But lo and behold, just two weeks later and before the pandemic, Tesla announced that it would sell another $2 billion in stock. On top of that, underwriters had the option to buy another 15%, or $300 million.
At the time, I think that was a smart move by Elon and company. Of course, you generally want to avoid telling your shareholders you’re going to dilute their ownership. But it can make sense when you think the share price is lofty, along with the valuation. So, Tesla thought it was a good time even though Elon Musk said it wasn’t necessary.
So, with that line of logic and shares up roughly another 300% from that issuance, it could make even more sense to issue more stock. Elon Musk has even raised concerns over Tesla’s sky-high valuation. Back at the start of May 2020 he tweeted “Tesla stock price is too high imo.” That was when shares traded for $140…
So, I expect the upward trend in shares outstanding to continue. In ARK Invest’s article on Tesla’s 2025 price target, it listed a $3 trillion market cap for the base case in 2025. That was just in one graph and I didn’t see any other discussion on dilution assumptions.
The analyst behind the ARK Invest article, Tasha Keeney, has passed the CFA exams and I’ve gone through those exams as well. They definitely help lay a solid foundation for understanding company and share price valuations. So, I’d be interested to see how they’ve updated their dilution forecasts.
Nonetheless, their Tesla price target of $3,000 and a $3 trillion market cap implies less than a 5% increase in shares outstanding in the next five years. I think that’s unrealistic and instead, let’s say shares outstanding continue to grow at half their past 5-year rate. That would be 30% and with that, here are the projected market caps for Tesla…
|Price Target||Market Cap|
|Expected Value||$3,000||$3.7 Trillion|
|Bear Case||$1,500||$1.9 Trillion|
|Bull Case||$4,000||$5.0 Trillion|
For some comparisons, let’s go forward with these adjusted market cap projections. Using ARK Invest’s $3,000 price target, that puts Tesla at a whopping $3.7 trillion… in less than five years.
That’s higher than Canada’s and Mexico’s GDPs combined. Standalone, that Tesla valuation would also put it above India’s current GDP, a country of close to 1.4 billion people!
Now for a better comparison, I could show you all the other auto manufacturers combined compared to Tesla. Although, this has been done many times and the main counter argument is that Tesla isn’t just a car manufacturer. It’s a technology company with more potential.
So instead, let’s compare to Amazon. Of course, this isn’t apples-to-apples but Amazon is breaking into markets with huge potential as well. It also has high margin segments that are growing such as AWS.
So, as I run some numbers by you, keep in mind that Amazon’s current market cap is $1.7 trillion. That’s less than half the size of the $3.7 trillion base case projection for Tesla…
Amazon is more established. Yet, it’s been growing revenue at a faster rate than Tesla, even in 2019 when it wasn’t benefiting from the pandemic lockdowns.
On the profitability side, Amazon reported net income of $21 billion in 2020. And Tesla reported just $0.7 billion. Sure, Tesla should become more profitable in the years ahead. But using some decent comparables, ARK Invest’s price target for Tesla is outrageous imo… and likely in Elon Musk’s opinion as well.
One of the biggest issues I have with ARK Invest’s valuation comes from Robotaxis. ARK assumes that Tesla has a 50% chance of delivering fully autonomous driving by 2025. They project Tesla’s Robotaxi efforts will account for half of Tesla’s total market cap and over a quarter of the company’s revenue.
That’s wildly optimistic. Sure, Tesla is making huge strides and has a massive data advantage. But there are some deep-pocketed competitors and more importantly, the final step of removing the driver comes with a lot of regulatory concerns.
Overall, I’m a huge fan of Tesla. I absolutely love what the company is doing and will hopefully be a customer in the coming years. Although, ARK Invest’s price target is absurd for five years. Sure, there could be an inflation spike or some other tail cases that make that happen. But as a pragmatic investor, some alarms were ringing when I looked at the data and trends.
I have no doubt that Tesla will hit those huge valuations… but in 10+ years is a little more realistic.