How Is Tesla Stock Worth $3,000? By Becoming Bigger Than Apple.

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ARK Invest’s Cathie Wood says


stock could be worth $3,000 in five years. How is that possible? By becoming bigger than Apple is now. Some of her assumptions, however, may be overly optimistic.

Over the weekend, ARK Invest’s disruption guru
Cathie Wood
put a five-year price target of $3,000 on Tesla. That’s higher than Piper Sandler analyst Alex Potter’s $1,200 target, the highest on the Street, but analysts are usually looking out 12 months, not multiple years.

Wood isn’t producing that target out of thin air. When she released it, she also produced some of the assumptions underlying her view. But one thing stands out: For Tesla to trade $3,000, it would have to produce more sales and more Ebitda—short for earnings before interest, taxes, depreciation, and amortization—than Apple (AAPL) does now. Which makes sense, given that Tesla at $3,000 would be worth $3.6 trillion including management stock options, around 1.8 times the $2 trillion Apple is worth now.

Overall, ARK expects Tesla to produce $700 billion in sales, $167 billion in cash flow, and $210 billion Ebitda by 2025. Apple generated about $274 billion in sales, $81 billion in operating cash flow, and $76 billion in Ebitda in its most recent fiscal year ended September 2020. 

The target, so far, hasn’t been the subject of a lot of critical analysis, beyond some angry tweets from Tesla (ticker: TSLA) bears. ARK didn’t respond to a request from Barron’s for comment about the new target price.

To get there, Wood starts with the assumption that Tesla will sell between 5 million to 10 million cars by 2025. That’s a wide range. But a financial model is an average or best approximation of many assumptions. At the midpoint of ARK’s range, Tesla would sell about 7.5 million cars in 2025. That’s one area where ARK appears more bullish than most, including the company itself. It’s about three times higher than Wall Street is modeling and represents about 70% average annual growth. Tesla, for its part, is targeting 50% average annual growth in vehicle sales. It’s still a big number, but if Tesla grows at 50% then 2025 sales end up at about 3.8 million units in 2025.

But the Bull case on Tesla is about more than auto sales. Autonomous taxis drive a big part of the ARK increased price target. ARK projects $327 billion in autonomous taxi revenue for 2025, almost as large as the vehicle business. Tesla’s car business is projected to generate roughly $90 billion in Ebitda, while the robotaxi business generates about $70 billion in Ebitda, according to the model. Today, however, autonomous taxis produce no revenue and no Ebitda at all yet. 

“Cathie is very bullish on robotaxis and many of Tesla’s next-generation endeavors, which could add another $500 per share to the stock in our opinion,” says Wedbush analyst
Dan Ives.

Still, some of the assumptions ARK uses to get to these numbers look a little generous. ARK assumes that Tesla’s working capital—all the inventory and accounts receivables along with short-term financing used to operate a business—in 2025 will be around $12 billion, roughly the same as 2020. It’s almost impossible that a car company manufacturing 15 times the number of vehicles it does today will have the same working capital requirements.

That’s a smaller problem in the grand scheme of things, but it overstates the cash-generating ability of Tesla a little bit. ARK expects about $167 billion in “cash generation” by 2025. It isn’t clear if that is free cash flow or cash from operations. Either way, it’s a lot of cash, about two times the cash flow generated by Apple over the past 12 months 

ARK also assumes that Tesla’s insurance business, with all the autonomous driving data coming off its cars, will be able to produce twice the profit margins of traditional auto insurance companies. It’s not a huge part of Tesla’s business: ARK sees Tesla insurance generating about $2.5 billion in operating profit in 2025, just 1.25% of Ark’s $200 billion operating profit estimate for the company in 2025. Tesla generated about $2 billion in operating profit this past year.

But Tesla won’t be the only one innovating. Even
Elon Musk
thinks other companies will have similar systems eventually. “Eventually, every car company will have long-range electric cars,” Musk said at the company’s recent annual shareholder meeting. “Eventually, every company will have autonomy, I think, but not every company will be great at manufacturing.”

Whether ARK’s numbers seem realistic or like a hopeless pipe dream likely depends on where one stands on Tesla. If it’s a car company, its current $700 billion valuation looks extreme compared with


(TM), the world’s second most valuable auto maker with a market cap of $250 billion, or


(VOW.Germany), the world’s largest auto maker by the number of cars produced, which has a market cap of about $160 billion.

ARK’s bet is that Tesla is something else altogether, something more like Apple. We’ll find out in 2025 if Wood is right.

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