ARK Investment Management, a thematic investment fund, revealed a new price target this weekend on Elon Musk's Tesla Inc., (NASDAQ: TSLA) after the electric automaker's big fourth-quarter earnings beat Wednesday.
Price targets are as follows:
- Expected Value (50% Probability): $7,000
- Bear Case (25% Probability): $1,500
- Bull Case (25% Probability): $15,000
The investment firm attributes this massive rise in stock price to three independent variables:
- Gross margins to approach 40%, in line with Wright's Law.
- Capital efficiency improvement with increased production scale.
- Evolution of autonomous capabilities and penetration of autonomous taxi service.
Gross Margins, Wright’s Law
The numbers are remarkable; ARK’s valuation is based on probability weighted scenarios and the assumption Tesla issues debt and equity capital to scale production and capitalize on its first-mover, competitive advantage.
“Based on this probability matrix, our bear case implies that Tesla will sell 3.2 million vehicles in 2024, cutting its share of total EV sales roughly in half compared to today’s levels. Our bull case implies that Tesla will maintain it’s roughly 18% market share, and that a substantial percentage of its fleet will generate high-margin robotaxi platform flees,” according to ARK.
Analysts at the firm acknowledge the calls are far-fetched, but suggest that research into gross margins and Wright’s Law is explanatory.
“In the fourth quarter of 2019, Tesla reported auto gross margins of 20.9% excluding regulatory credits. Based on Wright’s Law and expressed in ARK’s model, Tesla’s auto gross margins could approach 40% in 2024, though they are unlikely to increase in a straight line as new models launch and production scales,” according to ARK.
In regards to capital efficiency, ARK assumes Tesla will build factories for $11,000 per unit volume of capacity: “For context, Tesla confirmed that $1.5 billion in financing was necessary for its Shanghai factory, which will have an initial capacity of 150,000 vehicles. If $1.6 billion were to net 150,000 vehicles, the cost per unit of initial capacity would be roughly $10,700 before increasing productivity.”
Analysts at the firm also suggest Tesla has the know-how and technology to create a multi-transactional business model.
“Tesla could set rates comparable to the $2.50 per mile that Uber and Lyft charge today, dropping them to $1 per mile in 2023. We model that Tesla will take a 50% cut of gross revenues from autonomous taxi networks, much higher than the 20-30% cut that Uber and Lyft enjoy today,” according to the report.
Catherine Wood, CEO of ARK Invest, says Tesla’s recent run is demonstrative of high-pace growth.
“This is an exponential growth company. We’ve lived in a linear growth world for so long. With the law of large numbers pulling growth rates -- this is a prime example of exponential growth,” she said.
To read the full report, please visit ark-invest.com.
Tesla's stock closed Friday's session at $650.57 per share.
If you want to get your latest fix on what Tesla and Elon Musk are up to, check out part 2 of Third Row Tesla's interview with Elon and Kimbal Musk.
Photo courtesy of ARK.