Tesla’s share price surge over the past few days, and the past year, has stunned the financial markets and the automotive industry.
But some analysts believe that we’ve seen nothing yet, and if Tesla can land its “full self driving” technology, the stock could be worth up to $A6 trillion by 2024.
The stock’s recent gyrations – including the overnight near 20 per cent slump – have been attributed mostly to the actions of short-sellers trying to cover their positions.
But to focus on that only ignores the optimism and enthusiasm for Tesla products, and its prime position in what now seems to be the inevitable, and rapid, transition to electric vehicles.
As we have reported, the recent surge has attracted some big forecasts from major investors and analysts. Investor Ron Baron predicts the company could draw in revenues of more than $US1 trillion, and Ark Invest predicts the shares – currently around $US720 – could jump another ten-fold to around $US7,000 within five years.
But there is more to that analysis. The $US7,000 prediction is just the Ark Invest “base case”.
Its “bull case” puts the stock at $US15,000 a share, but it actually sees a potential share price of $US22,000 by 2024 if Tesla can deliver autonomous driving at a fraction of the current cost per mile of the likes of Uber and Lyft.
That translates into a market capitalisation of $US4 trillion, or $A6 trillion, compared to just $US131 billion at the close of trade on Wednesday in the US.
Ark Invest’s reasoning is published in a blog on its website. It makes fascinating reading and gives some insight into why so many big companies, Google’s Waymo, GM’s Cruise, and the Mike Cannon-Brookes backed Zoox included – are spending hundreds of millions of dollars trying to land autonomous driving technology
That is not as easy task, and it should be noted that even Ark Invest is not convinced that Tesla can get it right, or win that race. In fact, it only gives it a 30 per cent chance. But it says if Tesla does get it right, and can launch an autonomous taxi services (what Elon Musk calls robo-taxis) then the value add could be huge.
“A fully autonomous taxi network could break the mold of a traditional automotive manufacturer’s business model completely,” Ark Invest writes.
“Tesla could shift from a model of one-time transactions at hardware-like margins to a model of recurring transactions at software-like margins, charging passengers per mile and taking a platform fee.”
Ark Invest suggests that Tesla could set rates comparable to the $US2.50 per mile that Uber and Lyft charge today, dropping them to $US1 per mile in 2023. Tesla would take a 50% cut of gross revenues from autonomous taxi networks, higher than the 20-30% cut that Uber and Lyft enjoy today.
This would be based on the additional convenience, improved safety, and cost savings, as well as ARK’s analysis of platform fees in other markets.
“We also assume that its autonomous taxi service will begin in 2021, one year after Elon Musk has predicted the service will be available, regulatory approval permitting, with just 2% of eligible Tesla vehicles on the network in its first year.”
Ark Invest also assumes that Tesla will invest any incremental cash in additional factories to scale EV production capacity, lower production costs, further expand its fleet and “accelerate the world’s transition to sustainable energy,” consistent with its mission statement.
But what if it doesn’t go well, if Tesla cannot refine its Full Self Driving technology to the satisfaction of regulators, or consumers, and is left with only a market requiring people to drive its EVs.
It’s still OK, if less spectacular. Ark Invest is 80 per cent sure that Tesla will benefit from “Wrights Law” and deliver significantly higher margins on its EVs, and it remains an “innovation cycle” ahead of its legacy car-makers that are trying to catch up.
(Wright’s Law has forecast cost declines successfully in more than 60 technologies ranging from solar power to televisions, and from semiconductors to ovens. Ark Invest notes that Tesla’s Model 3 already has demonstrated cost declines in line with Wright’s Law).
“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,” Ark Invest says.
That would still deliver a strong company and business model, and a share price target of between $US2,500 and $US3,400 by 2024. A range of other scenarios with lower price targets takes in other possibilities, such as difficulties accessing capital markets, or lower costs, or even a “black swan” event.
Clearly, though, the cream is in full autonomy. Some futurists like Stanford University’s Tony Seba are convinced it will become such a thing – and the cost of travel will become so cheap – that we likely won’t own our own cars by around 2030.
Even oil giant Shell is predicting high levels of autonomous driving. The rewards will be huge for whichever company gets to deliver.