Tesla Roadster
Courtesy Tesla
Tech disruption guru and ARK Investment founder Cathie Wood says her firm will put out a new price target for Tesla stock soon. No one knows exactly when, but when it arrives it will be a big deal for Tesla fans.
The question for investors is what price for Tesla (ticker: TSLA) is likely.
Wood recently told Barron’s Jack Hough that the minimum return expected for a stock going into her portfolio is 15% a year for five years. “That’s a doubling over five years,” Wood said.
That’s what 15% a year for five years produces. There is a useful rule of thumb on Wall Street know as the “rule of 72.” The number 72 divided by the annual rate of return gives investors the years required to have a stock double. It’s an approximation, but a pretty good one. At 15% the rule of 72 equation yields 4.8 years. It actually takes about 4.96 years for an investment to double at 15% a year. Still, not bad.
Wood told Hough that Tesla stock will do “substantially more” than the 15% hurdle rate in her most bearish case for Tesla stock at current levels. Exactly what substantially better means and what current levels are is anyone’s guess. An annual return of 20% a year would yield a total return of about 150% over five years. That’s substantially more that 100% made earning 15% a year for five years.
As for levels, Tesla stock averaged roughly $650 for the past few days. That might mean Wood’s bear case is about $1,600 a share by 2026.
That leaves investors with base- and bull-cases to probe. Tesla stock has returned about 70% a year on average for the past five years. A repeat of that would put Tesla stock above $9,000 a share, making Tesla stock worth roughly $9 trillion. That might be too aggressive.
Amazon.com (AMZN) shares have returned about 40% a year on average for the past five years. If Tesla can reach that return, its stock would hit about $3,500 by 2026. That would make Tesla stock worth roughly $3.5 trillion, which would be more than all other auto stocks combined by a factor of two. Maybe cutting that figure to $3,000 is prudent.
Right in the middle of the bear- and bull-cases is a good guess for the base case. That yields $2,300 a share. At $2,300 by 2026, Tesla stock would have returned about 28% a year on average.
Wood’s target price for Tesla stock in five years could easily be north of $2,000. In 2018, Wood made a now legendary call that Tesla would hit $4,000. That was before the stock split 5 for 1. Her call amounted to $800 a share, a level Tesla hit in late 2020.
Going from $800 to $2,000-plus might seem like a stretch. How can things have gotten that much better less than three years after the initial $800 call? Well, Tesla has made more money faster than expected, EV battery costs have continued to fall, and more auto maker have committed to an all-electric future.
Things are better for EVs.
Wall Street’s top Tesla target price is from Piper’s Alex Potter at $1,200 a share. Wall Street target prices are typically where analysts expect prices to go over the coming 12 months.
Tesla stock has hit a bit of a speed bump lately. Shares are down about 15% so far this year, lagging behind returns of the S&P 500 and Dow Jones Industrial Average. Business execution doesn’t appear to be the issue. Fears of inflation and higher interest rates have hit stock prices of many high growth stocks lately.
Tesla is a high-growth company. It expects to increase volume at 50% a year on average for the foreseeable future.
Write to Al Root at [email protected]
