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Ark Invest’s bull case for Tesla’s share price

Tesla [TSLA] has been centre stage across Ark Invest’s funds, which is perhaps unsurprising given that they focus on innovative companies and disruptive technologies.

A recent update from Ark Invest — in a research paper published on 19 March — reaffirmed its bullish investment case for the electric vehicle (EV) maker, sending Tesla’s share price up 2.3% on Monday 22 March. 

Tesla’s share price had declined 5.6% through that week, closing at $654.87 on 19 March. Then, following a jump on Monday, Tesla’s share price fell a further 5.5% last week, closing at $618.71 on Friday 26 March.

The stock was down 12.3% year-to-date through 26 March’s close, underperforming the S&P 500’s 5.8% climb in the same period. In comparison, Tesla’s share price was up 26.2% during the same period in 2020.

The company’s year-to-date share price performance has also underperformed the broader EV market. The Global X Autonomous and Electric Vehicles ETF [DRIV], which had a 2.20% weighting in the stock as of 26 March, was up 9.8% in the same period.

According to data from ETF.com, circa 54.4 million Tesla shares are held across 209 ETFs in the US. The stock's largest holder was the Invesco QQQ Trust [QQQ], which had a 3.97% weighting as of 26 March.


Unpicking Ark Invest’s Tesla 2025 analysis

In the recent paper written by Tasha Keeney, an analyst for Ark Invest’s autonomous technology and robotics strategy, the firm put forward updated research for its Tesla model.

Ark Invest previously estimated that Tesla’s share price would reach $7,000 per share by 2024, or $1,400, accounting for its five-for-one stock split in August 2020. However, the firm is now forecasting that the stock could hit an adjusted $3,000 by 2025 on a base case, with a bullish price target of $4,000 and a bearish target of $1,500.


Ark Invest's best case price target for Tesla 2025

The price targets were based on a Monte Carlo model that had 34 inputs, with the high and low targets incorporating 40,000 simulations.

Some of the updates to the investment case include increasing assumptions for Tesla’s capital efficiency. Ark forecast Tesla to post unit sales of between five and 10 million vehicles in 2025.

The firm also estimates that the company could achieve better-than-average margins for its insurance product, which was launched in 2019 in California. Ark Invest believes that the driving data that Tesla collects could be used to help it offer dynamic pricing, which would lower customer acquisition costs and increase margins.

Based on Ark Invest’s bear case model, Tesla’s opportunity to launch a ride-hail service could boost its operating profit by an additional $20bn by 2025, which increased the firm’s price target by circa $500.


Is Ark Invest’s Tesla share price target unrealistic?

Investors appear to be sceptical of Ark Invest’s Tesla model. Bill Maurer, a part-time trader, wrote in Seeking Alpha that he thought the firm had “unrealistic assumptions” and found the paper to have multiple errors, reducing its credibility in his eyes.

He highlighted the firm’s prediction that Tesla’s yet-to-exist ride-hailing business could generate $42bn in revenue by 2025. Maurer argued this appeared stretched at 10% more than Uber Technologies’ [UBER] guidance for that year.

“We don’t even know if [a Tesla ride-hailing business] will ever exist, but Ark Invest has it soaring past Uber’s total revenue in just four years, and this includes the fact that Tesla will price its service significantly lower than the likes of Uber and Lyft [LYFT],” Maurer wrote.

"We don’t even know if [a Tesla ride-hailing business] will ever exist" - Bill Maurer, Seeking Alpha

However, Catherine Wood, CEO of Ark Invest, isn’t the only investor predicting that Tesla’s share price could reach $3,000 per share. Analysts at Citigroup, New Street Research and Wedbush believe that the company could reach a $3trn valuation by 2030, according to Bloomberg.

Greg Taylor, chief investment officer at Purpose Investments, told the publication that he sees Tesla as more of a momentum stock “that is really all about the optimism of the future”.

A decade ago, the same could be said of Apple [AAPL], but today Taylor says that the tech giant has almost become a defensive play. “It’s the company with one of the best balance sheets out there. And it’s become almost the new defensive that when people buy the market, they buy Apple,” Taylor said.

Tesla’s shares have a consensus hold rating among 29 analysts polled by TipRanks, with an average price target of $628.29, representing a 1.5% increase from its 26 March close.

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