Ron Baron Reaffirms Confidence in Tesla’s $5 Trillion Future

Ron Baron, a billionaire mutual fund investor and founder of Baron Capital, has made headlines for his bold prediction regarding Tesla (NASDAQ: TSLA). During his interview with CNBC’s Squawk Box back in November, Baron stated that he forecasts Tesla reaching a $5 trillion valuation within the coming decade. Recently, he reiterated this belief in another appearance on the same program.

As of market close on March 21, Tesla’s market capitalization stood at $800 billion. The question many investors have is whether Tesla can genuinely increase its value by more than 500% as Baron suggests. Let’s examine the underlying factors behind Baron’s bullish outlook and evaluate the feasibility of Tesla’s rise to a $5 trillion valuation.

Autonomous Driving: A Game Changer for Tesla

Artificial intelligence (AI) is becoming increasingly relevant in the automotive sector, particularly in the development of autonomous driving technology. This innovation allows vehicles to operate without human intervention, and Tesla CEO Elon Musk has been forthright about his plans to integrate self-driving capabilities into the company’s cars. Currently, Tesla owners have the option to subscribe to the company’s Full Self-Driving (FSD) software in certain regions.

However, the more promising opportunity for Tesla may lie in its robotaxi initiative. This ambitious program aims to deploy a widespread fleet of Tesla vehicles for consumer use. Below, I will outline how robotaxis could serve as a significant driver behind Tesla’s potential valuation surge into the trillions.

Image source: Tesla.

The Financials Behind Tesla’s Self-Driving Ambitions

In a recent segment on CNBC, Baron laid out his reasoning behind Tesla’s potential. Initially, his projections might sound overly optimistic. One key question arises: why are robotaxi businesses expected to possess such high profit margins?

Ron Baron about Tesla $tsla: “If you do 50,000 miles a year for a car (Robotaxi) those cars generate … 30, or 40 or 50,000 Dollars in profits per year. Per car.”

“So every time you have a million cars you adding 30, or 40 or 50 Billion Dollar to profits per year.” pic.twitter.com/5sTbakQKsi

The expectation is that FSD, offered as a subscription service, could yield high gross margins due to its recurring revenue model. If Tesla successfully implements fleets of robotaxis globally, customers might utilize these vehicles for rides or rentals while on the go.

This strategy aims to convert the recurring nature of FSD subscriptions into a commercially available fleet for various services. If executed properly, robotaxis could emerge as a highly productive segment for Tesla and generate billions in additional cash flow. This potential success could lead investors to assign Tesla a valuation multiple akin to those typically seen in thriving software companies.

The Challenges on the Road to $5 Trillion

Having spent years as a financial analyst in an investment bank, I am familiar with financial modeling’s sensitivity. Each forecast can change dramatically based on the underlying assumptions.

While I recognize the promise of the robotaxi initiative, I find myself grappling with critical questions:

• How will robotaxi services compare competitively to those from Waymo and others at scale?
• Will Tesla collaborate with ride-hailing companies like Uber and Lyft or choose to compete against them directly with their robotaxi fleets?
• What regulatory hurdles might impact the rollout of robotaxi services?

These considerations highlight the need for cautious optimism regarding Tesla’s potential. Forecasting the future requires incorporating these variables, which can complicate predictions further and amplify the uncertainty.

Ultimately, I believe the robotaxi venture could thrive, but I would advise against investing in Tesla with the expectation of a sixfold increase in value over the next several years.

For growth-oriented investors willing to manage volatility and looking for entry into the AI sector, purchasing Tesla stock during its current dip and holding it long-term could be a sensible strategy.

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Adam Spatacco is invested in Nvidia and Tesla. The Motley Fool has positions in and recommends Nvidia, Tesla, and Uber Technologies. 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.