Market Commentary: Why Tesla Could 4x in the Next 7 Years
The founder of Baron Capital, a firm with approximately $50 billion under management, believes that Tesla has the potential to quadruple in value over the next seven years.
Ron Baron isn’t just a voice in the wind, his fund has delivered an annualized return of 15.4% over the last 20 years, handily beating the S&P 500. And now he sees the potential for Tesla shares to soar above $1,000 and beyond, is he right?
Key Points
- Ron Baron’s bullish stance on Tesla is built on three key pillars: market penetration, technological innovation, and Elon Musk’s leadership. He notes that Tesla currently accounts for only 1-2% of the $2.7 trillion global car market, suggesting ample room for growth.
- Tesla is not just a car manufacturer but a technology firm, having invested $3 billion in R&D last year. It has potential to disrupt sectors beyond automobiles, including utilities and home automation, which is vital for its long-term success.
- Despite Baron’s optimistic view, he acknowledges potential hurdles such as competition, regulation, and market cyclicality. Tesla’s current valuation has a high P/E ratio of about 71.6x, but Baron suggests that Tesla could reach a $3.2 trillion market cap by 2030.
Baron Is a Long-time Bull
Ron Baron isn’t new to the Tesla bull camp. Baron Capital first invested in Tesla back in 2014 when shares were trading around $208 (split-adjusted).
Following all its splits, he’s already enjoyed a 4x return and Baron and believes 20x is possible. It’s hard to debate his vision. After all, he had the foresight to see Tesla as a game-changer in both the automobile and renewable energy sectors, and he sees much more potential still.
His argument rests on a multi-pillared foundation that includes market penetration, technological innovation, and Elon Musk’s leadership.
Market Penetration
Baron argues that Tesla’s share in both the electric and internal combustion engine (ICE) auto markets is still modest, despite its market leadership in the EV segment.
The global car market is estimated to be worth around $2.7 trillion, and Tesla currently accounts for a mere 1-2% of that. Baron’s projection implies Tesla’s potential to dominate not just the electric vehicle market, but the automobile market as a whole.
Technological Innovation
Tesla isn’t just a car company; it’s a technology company. Beyond cars, Tesla is also involved in renewable energy solutions like solar roofs and the Powerwall battery system. In the longer run, their technology could disrupt multiple sectors, including utilities and home automation.
Baron points out that Tesla’s capital investments in research and development stand out in comparison to competitors. Tesla spent $3 billion last year in R&D, and Baron believes Musk’s aggressive reinvestment into innovation is a key pillar to the firm’s long-term success.
The Elon Factor
He admits that Musk has been a magnet for controversy, but he’s also a serial entrepreneur with a track record of taking companies to new heights.
Baron believes that Musk’s ambition and relentless drive can propel Tesla to 4x or possibly even 5x.
He implies that by standing at the helm of other firms, such as SpaceX, Neuralink, and The Boring Company, synergies among the firms may exist down the line.
What Could Go Wrong?
Intensifying competition from legacy automakers and new entrants, potential regulatory hurdles, and market cyclicality could all pose threats to Tesla’s further ascension.
Not to mention, Tesla’s current valuation already seems rich, trading at a P/E ratio of approximately 71.6x as of this writing. Compare that to Ford, which has a modest 12.2x multiple.
Regardless, Baron remains optimistic, and suggests that Tesla could grow to a market cap of around $3.2 trillion by 2030.
To reach this, Tesla would need to maintain an annual growth rate of around 19% for the next seven years, a figure that looks daunting but is not out of line with its historical performance.
Since 2016, Tesla has achieved an astounding annual revenue growth rate of about 50%, according to data from YCharts.
The Bottom Line
Ron Baron’s conviction that Tesla could quadruple in seven years comes from a multi-factor analysis that spans market potential, technological innovation, and strong leadership.
While lofty, these aspirations aren’t completely detached from reality. But like any investment, the journey is likely to be punctuated with volatility. Tesla has a habit of bucking weak-hands off its bull run; this is a bet for those with conviction.
