Ron Baron, a billionaire and the founder and CEO of Baron Capital, leads an asset management company that oversees multiple mutual funds. Over the past five years, the Baron Partners Fund achieved an impressive 29% annual return, significantly outperforming the S&P 500 (SNPINDEX: ^GSPC), which returned 15% annually during the same period.

Tesla (NASDAQ: TSLA) remains the fund’s largest asset, making up 41% of the portfolio as of December 2024, an increase from 38% the previous year. Baron is optimistic about Tesla’s future, telling CNBC that the company might reach a valuation of $5 trillion within ten years, suggesting an impressive 285% upside from its current market cap of $1.3 trillion.

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Baron cites advancements in autonomous driving technology and robotics as key factors driving Tesla’s potential price growth. Here are the essential highlights.

Challenges in Tesla’s Financial Performance

Tesla’s financial results for 2024 fell short of expectations due to high interest rates affecting demand and price cuts impacting profits. Deliveries decreased by 1% to 1.79 million, marking the company’s first annual drop. Revenue climbed only 1% to $97 billion, while the operating margin contracted by 2 percentage points. Non-GAAP net income also dipped 22% to $2.42 per diluted share.

On a positive note, Tesla maintained its top position in global battery-electric car sales, despite losing 2.5 percentage points of market share last year. CEO Elon Musk indicates that significant developments this year could set the stage for an “epic 2026” and a “ridiculously good” 2027 and 2028. One exciting prospect is the anticipated launch of a sub-$30,000 vehicle known as the Model Q, expected to debut in the first half of 2025.

Additionally, Tesla made remarkable strides in its full self-driving (FSD) software last year, achieving a 1,000-fold improvement in performance indicated by fewer critical interventions. Musk announced plans for an autonomous ride-sharing service in Austin starting June 2025, with rollouts to “several other cities in America by the end of this year.”

Additionally, Tesla is leveraging its AI capabilities to develop humanoid robots called Optimus, with plans to manufacture 10,000 units by 2025. Musk expects these robots to assist in Tesla factories this year and suggests they could be marketed to other firms as soon as the second half of 2026, although he recognizes the speculative nature of this timeline.

Vision of a $10 Trillion Market in Autonomous Driving Technology

Alphabet‘s Waymo initiated its robotaxi service in Phoenix in December 2018, expanding to various cities afterward. Having experienced a Waymo ride in San Francisco, I can attest to its impressive performance. While Tesla may currently lag in this area, it possesses benefits in data collection and cost that could give it an edge in scaling its ride-sharing platform.

• Data advantage: Tesla’s fleet comprises millions of cars equipped with autopilot technology, gathering extensive video data. Ark Invest estimates that Tesla collects data from 3.5 billion miles annually, dwarfed by Waymo’s 37 million miles. This significant disparity means Tesla can more effectively train its FSD models.
• Cost advantage: Tesla’s FSD system relies solely on computer vision, utilizing inputs from eight external cameras. The company claims it can construct a robotaxi at a cost of $25,000, compared to Waymo’s sixth-generation vehicles, which involve complex setups costing up to $100,000, as noted by co-CEO Dmitri Dolgov.

Overall, the potential for robotaxis is substantial. Ark Invest estimates the addressable market could reach $10 trillion by 2030, and Musk asserts that FSD technology could elevate Tesla’s gross margin to 70%, compared to last year’s gross margin of 17.9%.

Image source: Getty Images.

Humanoid Robots: Another $10 Trillion Opportunity

Musk described Optimus as “the most advanced humanoid robot by a long shot.” Initially designed for labor-intensive or hazardous tasks in factories, Optimus aims to achieve skills such as threading a needle and playing piano, signaling diverse operational possibilities.

As noted, the company plans to produce around 10,000 Optimus robots in 2025, with active operations in Tesla factories anticipated by year’s end. Insights gained from these robots will guide production for a second model expected in 2026, potentially allowing Tesla to begin selling Optimus to external businesses in the latter half of next year.

Importantly, Musk indicated on the fourth-quarter earnings call that “Optimus has the potential to generate north of $10 trillion in revenue.” He has frequently remarked that Optimus could become Tesla’s most valuable product and may even lead to the company surpassing the value of the next top five companies combined.

Valuation Concerns: Is Tesla Stock Overvalued?

Analysts predict Tesla’s adjusted earnings will grow by 22% annually through 2027, making its current valuation of 140 times adjusted earnings appear excessive. This estimate, however, does not consider the potential for significant earnings growth following the launch of autonomous ride-sharing and humanoid robotic services.

Recognizably, investing in Tesla carries substantial risk, as expectations surrounding its AI advancements are already reflected in its valuation. Therefore, if the company struggles to scale its robotaxi and robotics operations, the stock could face a sharp decline. Conversely, if Tesla succeeds in achieving its objectives, it could lead to a much higher valuation. Investors must assess which scenario they believe is more likely.

I personally maintain an optimistic view, believing that Tesla will fulfill its promises, which could bring its market value to $5 trillion. However, I recognize the uncertainty of my predictions.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Tesla. The Motley Fool has positions in and recommends Alphabet and Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.