Can Tesla get bigger than Apple? This analyst says yes

Can Tesla take on the likes of Apple within four years? Pictue: AFP

ARK Invest’s Cathie Wood says Tesla stock could be worth $US3000 in five years from its current price near $US630.

How is that possible? By becoming bigger than Apple is now.

Tesla is the most popular overseas stock held by Australian retail investors on virtually all share trading platforms.

The Ark Innovation ETF gained worldwide attention in 2020 when it rose 150 per cent. But Wood, the remarkably successful CEO of the Ark Investment Management fund (a key holder of Tesla stock), may be over-optimistic.

After all, the $US3000 target is higher than Piper Sandler analyst Alex Potter’s $US1200, the highest on Wall Street, but analysts are usually looking out 12 months, not several years.

However, Wood isn’t producing that target out of thin air. When she released it, she also revealed some of the assumptions underlying her view. But one thing stands out: for Tesla to trade at $US3000, it would have to produce more sales and more EBITDA (earnings before interest, taxes, depreciation and amortisation) than Apple does now. Which makes sense, given that Tesla at $US3000 would be worth $US3.6 trillion including management stock options, around 1.8 times the $US2 trillion Apple is worth now.

Overall, ARK expects Tesla to produce $US700bn in sales, $US167bn in cashflow and $US210bn EBITDA by 2025. Apple generated about $US274bn in sales, $US81bn in operating cashflow and $US76bn in EBITDA in its most recent fiscal year ended September 2020.

The target, so far, hasn’t been the subject of a lot of critical analysis, beyond some angry tweets from Tesla bears.

Certainly some of the assumptions ARK uses look a little generous. ARK assumes that Tesla’s working capital — all the inventory and accounts receivables along with short-term financing used to operate a business — in 2025 will be around $US12bn, roughly the same as 2020. It’s almost impossible that a car company manufacturing 15 times the number of vehicles it does today will have the same working capital requirements.

To get there, Wood starts with the assumption that Tesla will sell between five and 10 million cars by 2025. That’s a wide range. But a financial model is an average or best approximation of many assumptions. At the midpoint of ARK’s range, Tesla would sell about 7.5 million cars in 2025.

That’s one area where ARK appears more bullish than most, including the company itself. It’s about three times higher than Wall Street is modelling and represents about 70 per cent average annual growth. Tesla, for its part, is targeting 50 per cent average annual growth in vehicle sales. It’s still a big number, but if Tesla grows at 50 per cent then 2025 sales end up at about 3.8 million units in 2025.

But the bull case on Tesla is about more than auto sales. Autonomous taxis drive a big part of the ARK increased price target. ARK projects $US327bn in autonomous taxi revenue for 2025, almost as large as the vehicle business. Tesla’s car business is projected to generate roughly $US90bn in EBITDA, while the robotaxi business generates about $US70bn in EBITDA, according to the model. Today, however, autonomous taxis produce no revenue and no EBITDA at all.

“Cathie is very bullish on robotaxis and many of Tesla’s next-generation endeavours, which could add another $US500 per share to the stock in our opinion,” says Wedbush analyst Dan Ives.

ARK also assumes that Tesla’s insurance business, with all the autonomous driving data coming off its cars, will be able to produce twice the profit margins of traditional auto insurance companies. It’s not a huge part of Tesla’s business: ARK sees Tesla insurance generating about $US2.5bn in operating profit in 2025, just 1.25 per cent of Ark’s $US200bn operating profit estimate for the company in 2025. Tesla generated about $US2bn in operating profit this past year.

But Tesla won’t be the only one innovating. Even Tesla CEO Elon Musk thinks other companies will have similar systems eventually. “Eventually, every car company will have long-range electric cars,” Musk said at the company’s recent annual shareholder meeting. “Eventually, every company will have autonomy, I think, but not every company will be great at manufacturing.”

Whether ARK’s numbers seem realistic or a pipe dream depends on where one stands on Tesla. If it’s a car company, its current $US700bn valuation looks extreme compared with Toyota, the world’s second most valuable carmaker with a market cap of $US250bn, or Volkswagen, the world’s largest carmaker by the number of cars produced, at $US160bn.

ARK’s bet is that Tesla is something else altogether, something more like Apple. We’ll find out in 2025 if Wood is right.

Barron’s