Tesla’s Future Hinges on Autonomous Technology Amid Current Sales Decline

Tesla (NASDAQ: TSLA) stands as a frontrunner in electric vehicle (EV) manufacturing. However, investor attention now shifts towards its full self-driving software (FSD), the prospective Cybercab robotaxi, and the Optimus robot—products many believe could form trillion-dollar markets in the future.

Cathie Wood, founder of Ark Investment Management, oversees exchange-traded funds (ETFs) that invest in innovative tech companies, with Tesla being its largest holding. Last year, Ark published a report predicting that Tesla’s Stock might reach $2,600 by 2029, driven largely by FSD and the Cybercab.

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Despite this optimistic forecast, the share price has fallen by 43% from its recent peak due to significant struggles in Tesla’s core EV business. Nonetheless, Wood remains resolute; in an interview with Bloomberg TV last Tuesday, she reiterated Ark’s $2,600 target for Tesla Stock, suggesting an extraordinary 855% upside potential.

Here’s what investors should consider before purchasing the Stock based on Wood’s predictions.

Image source: Tesla.

Tesla Faces Global Decline in EV Sales

Heading into 2023, Tesla’s CEO, Elon Musk, announced ambitious plans to increase EV production by 50% annually. Although Tesla achieved a record 1.8 million cars delivered that year, this marked only a 38% year-over-year increase. By 2024, however, deliveries had shrunk by 1%.

The challenge lies in the disconnect between Musk’s production goals and consumer demand. January and February of this year showed a sharp 43% decline in Tesla’s EV sales across Europe compared to the same timeframe last year. In Australia, sales plummeted by 66%, while sales in China are likely to remain stagnant for the first quarter.

Notably, despite an overall increase in EV sales worldwide, Tesla’s vehicles appear to be losing favor with consumers. This trend stems from a variety of factors.

For one, competitors like BYD and Great Wall Motors offer base-model EVs priced under $15,000 in their domestic markets, rapidly expanding their global footprint. Tesla struggles to compete at these price points.

Additionally, Musk’s involvement in U.S. and international politics may be deterring some buyers. Recent incidents targeting Tesla dealerships and vehicles have raised concerns, potentially leading to higher insurance costs. There are even reports of increasing numbers of Tesla owners trading in their vehicles, which drives down resale values.

Image source: Getty Images.

Future Valuation Tied to Autonomous Driving Technology

Last year, Tesla reported $97.6 billion in revenue, with 79% generated from EV sales. Ark’s financial projections, however, indicate that by 2029, EV sales could drop to just 26% of total revenue, while autonomous ride-hailing may dominate.

The Cybercab—a fully autonomous robotaxi—will play a pivotal role in this transition. It will utilize Tesla’s FSD software and will not require pedals or a steering wheel, facilitating around-the-clock revenue generation without human intervention.

Currently, FSD has not gained approval for unsupervised use on U.S. roads, impeding the launch of the Cybercab. Yet, Musk is optimistic about receiving regulatory approval in California and Texas this year, despite falling behind competitors like Alphabet’s Waymo, which is already conducting over 200,000 paid autonomous trips weekly in cities like San Francisco, Los Angeles, and Phoenix.

When the autonomous ride-hailing service becomes operational, Ark anticipates it could generate $756 billion in annual revenue by 2029, accounting for 63% of an estimated $1.2 trillion in total company revenue. This projection supports Ark’s $8 trillion valuation for Tesla, underpinning the $2,600 target for its Stock.

While Ark’s financial forecasts are ambitious, they raise important questions. It took Tesla 14 years from the launch of its Model S in 2011 to achieve nearly $100 billion in annual revenue. Thus, the prospect of increasing revenue twelvefold to $1.2 trillion in the next five years seems overly optimistic, especially given that the Cybercab may not reach mass production until 2026.

Tesla’s Current Stock Valuation Raises Concerns

Tesla’s earnings per share (EPS) dropped 53% in 2024, landing at $2.04. The company has lowered prices for many EVs to boost demand, which has severely affected profit margins.

This decline results in an exorbitant price-to-earnings (P/E) ratio of 134 for Tesla’s Stock, nearly six times the average P/E ratio of 22.9 for the S&P 500.

If the stock were to drop by another 82%, it would align with the S&P 500’s valuation. However, continued declines in EV deliveries could further reduce EPS, suggesting more downside potential for the stock price.

In conclusion, while Tesla Stock presents a potentially compelling opportunity, particularly if Ark’s long-term predictions hold true, investors should exercise caution before paying significant premiums at the current price.