Ladies and gentleman, shorts and longs, investors of all industries, step right up and prepare yourselves for a tale of great financial speculation. Tesla's valuation has been a topic of great debate over the past several months, and its stock the focus of many. Both individuals and large investment firms alike are looking to capitalize on the automaker's bleeding-edge approach to the automotive industry, some for the personal belief of Tesla's mission, and other for the potential bullish market opportunity of a lifetime.
Tesla has entered peak fear, uncertainty, and doubt (FUD) season, partly due to its sharp rise in popularity over the past several years. Its most recent claim to fame is the automaker's premium midsize sedan, the Model 3, which has not only outsold all other vehicles in its class last fiscal quarter but is doing so while being powered by a battery. But despite the nay-sayers spreading the FUD and short-sellers potentially manipulating the market, another large threat that is often overlooked is overconfidence. Let's sit back as armchair economists and critically evaluate if the industry is ready to support a huge jump in Tesla's market cap.
Back in February, the Chief Investment Officer of ARK Invest, Catherine Wood, announced her organization's price targets for Tesla's stock. ARK's claim was that Tesla's shares could likely approach an all-time high (ATH) well above what the market has seen throughout the company's existence: $4,000. While it's normal for any successful company to grow and appreciate in value, even Tesla's CEO Elon Musk noted that the company's stock was higher than deserved, and that was only last year.
Months of silence followed until Musk announced on Twitter that he had a potential plan to take the company private at $420 per share, an action which ultimately sparked an SEC investigation amid a rash of both support and opposition from shareholders. This prompted Wood to publish an open letter to dissuade Musk & Co. from privatizing Tesla, providing valuation predictions to substantiate the company's claims.
Wood has maintained the position that ARK foresees Tesla's shares reaching as high as $4,000 in the next five years should a bullish market help to push the currently profitless company over the edge of financial clemency with its investors. This, of course, is the company's best case scenario according to ARK. The same timeframe's conservative bear market target is $700, leaving investors with quite a speculative range, though undoubtedly a significant gain prediction nevertheless.
To put these claims into perspective, ARK's $4,000 per share best-case scenario target would be nearly a 1,200 percent valuation increase, a number similar to the Bitcoin bubble of 2017 (which ARK had purchased, reportedly under $250). This would value Tesla's market cap at almost $700 billion, or well over three times that of Toyota. As of May 2018, the total value of the ten largest automakers in the world account for around $756 billion; if these numbers were to theoretically remain static (less ARK's best-case projection), Tesla's market cap would account for 49.7 percent of the top ten automaker's wealth combined, and place the company as the U.S.'s fifth highest ranking for market cap.
ARK projects that a portion of this wealth will be accumulated as the automaker gains the functionality to produce and deliver more vehicles as it grows. The firm believes that the annual sales of Tesla's vehicles will increase from almost 127,000 units per year to 1.6 million units, raising its annual vehicle-based revenue from $13.7 billion to $81.6 billion and boosting its gross margin to the highest in the industry, 30 percent, presumably thanks to better economies of scale.
Currently, Tesla seeks a year-end goal to output 10,000 Model 3s per week, a number which it has been promising and is on target for delivering, despite the negative speculation by many. This leaves a relative output of 520,000 Model 3s to be produced by the end of 2018. Additionally, based on Q1 2018 delivery data, one may speculate that Tesla's more premium offerings, the Model S and Model X, may account for another 100,000 annual vehicle sales. No data is available on the unreleased Roadster or commercially-focused Semi truck. It is unclear if ARK is projecting additional vehicle demand to account for the additional 980,000 units, or if it is speculating additional vehicle offerings.
In actuality, the centralization of wealth around Tesla is made up of more than just the electric cars. The company has absorbed the duties (and debts) of other projects that play into its Master Plan, such as sustainable energy through Solar City and its power storage division. But where ARK really sees a new chunk of money rolling in is the automaker's emerging mobility-as-a-service (MaaS) platforms, including its focus on bringing more advanced vehicle autonomy to a mainstream ridesharing service and logistic transportation industries.
To touch on the practicality of commercialized full autonomy within the projected timeframe that was set forth by ARK, one must consider the current state of the industry. In short; it's a mess.
Realistically, ARK's position that full driverless autonomy commercializes by 2022 is very unlikely, as not only must the existing technology rapidly and reliably improve, but it must also undergo cumbersome testing to ensure its roadworthiness, addressing looming safety and functionality hurdles that must be overcome.
Tesla has invested heavily in semi-autonomous driving (which it calls Autopilot) with the eventual goal of full autonomy available with just a software update for most owners. Unlike companies Waymo and Uber which utilize LiDAR and other technologies in its autonomy development, Tesla heavily focuses on the use of passive optical image recognition with up to eight cameras mounted on a vehicle. In addition, Telsa makes use of radio waves, or radar, to map out its surroundings rather than pulses of light emitted by a LiDAR puck, something which Musk reportedly called “expensive, ugly and unnecessary.”
Should Tesla be able to perfect its full self-driving (FSD) platform without any additional hardware replacement, it could easily have a leg-up in the game, so as long as the industry can play nicely together; more on that later.
Sadly, its timeline doesn't seem to line up with ARK's prediction of readiness and deployment within the next five years. In actuality, Musk's team is hard at work still developing core functionality that will need to undergo extensive testing before it is even remotely ready for the road.
"Please note that self-driving functionality is dependent upon extensive software validation and regulatory approval, which may vary widely by jurisdiction," reads Tesla's website. "It is not possible to know exactly when each element of the functionality described above will be available, as this is highly dependent on local regulatory approval."
As noted by the FSD disclaimer above, even successful development doesn't guarantee a timeline of availability. This is largely due to the lack of formal and complete legislation surrounding the topic as a whole. Federal regulations continue to lack the mandated guidance necessary for governing bodies to sculpt the future of autonomy.
Even the most involved manufacturers still can't agree on standards that ensure safety and define working functional autonomy levels, resulting in proprietary inter-vehicle communication systems being forced into circulation with hopes that market share will be the sole decider of certain de facto standards. But if manufacturers and engineering organizations like the SAE and ITU can't all agree on codification, the industry will effectively stonewall itself into exhaustion, all while opening the risk of harming individuals in the interim.
As The Drive's Editor-at-Large Alex Roy puts it, "You can't fix a taxonomy this broken."
I won't call future grown prediction of any company a guessing game, but the industry as a whole is fairly new. Fortunately for Tesla and its investors, the automaker earned its reputation by essentially streamlining EV adoption into modern society, something which occurred at a rate that would have been unfathomable only a few years ago. If all conditions for technological development, legislative guidance and inter-brand connectivity happen to align with no foreseeable shortcomings, then ARK's prediction could be spot on, but that heavily relies on a great number of what-ifs.