In 2018, Tesla share price spent most of the year hovering around the $500 level. Cathie Wood made a bold prediction then that Elon Musk’s car manufacturer would reach $4,000 per share, implying a trillion dollar market capitalization.
It seemed preposterous. The only companies that flirted with such a market cap were Microsoft, Alphabet, Apple and Facebook, now Meta.
Yet Cathie had connected the dots. Massive demand had overwhelmed supply. Tesla’s problem was how fast it could build factories to produce sufficient units for the car. And then there was the software advantage.
Other manufacturers focused on hardware. Tesla was software-focused, and was at least a half a decade ahead of its competition. Add the optionalities of robotaxis and a bull case formed that was widely ridiculed. Until she was proven right. Tesla soared to $4,000 pre-split, and she was widely lauded.
Now she’s come out with a new price target, and it seems as outlandish as her original claim, perhaps even more so.
- Cathie Wood has made a bold prediction that Tesla could hit $2,000 per share by 2027. This would put Tesla’s market capitalization at over $6 trillion, which would be more than twice the value of Apple’s market cap at its peak.
- Wood’s prediction is based on a Monte Carlo analysis, a mathematical approach to model the behavior of a system with random variables. However, Monte Carlo analysis has its limitations.
- Tesla has demonstrated astonishing financial performance in recent years, there are a number of factors that could derail Tesla’s growth, such as increased competition from other electric vehicle manufacturers, rising costs of raw materials, or a global economic recession.
Will Tesla Hit $2,000?
According to Cathie Wood’s ARK Invest, Tesla could hit $2,000 by 2027.
Tesla has already split a few times. It had a 5-for-1 split in 2020 and a 3-for-1 split in 2022. At today’s share price, Tesla would need to rise by about 12x to hit the $2,000 target price.
It’s worth pointing out that $2,000 is the expected value ARK Invest has for Tesla share price by 2027. The bear case places it at $1,400 while the bull case has it at $2,500.
At the time of our research, Tesla had a $523 billion market capitalization, so a 12x gain from there would put a $6 trillion market cap on Tesla. That’s over 2x more than Apple was worth at its peak.
So, is it reasonable?
The Monte Carlo Fallacy
The methodology ARK Invest uses to forecast Tesla’s share price is a Monte Carlo analysis. It’s a powerful tool because it can synthesize a lot of factors that affect price. For example, it can account for financial performance as well as economic factors and sentiment analysis.
But it also has drawbacks. The range of future outcomes is wide. What if the raw materials Tesla needs become constrained due to overwhelming demand from EV manufacturers? What if it cannot build giga factories fast enough to meet demand that grows exponentially? What if demand softens as an increasing number of competitors attract attention from prospective buyers? And so on. Identifying the most likely outcome can be difficult. And the inputs that produce the output are crucial, which leads to a question over what inputs are being used?
One controversial one is the seamless scaled rollout of robotaxis, which ARK Invest has already largely been criticized for being too optimistic about.
How High Can Tesla Go?
With all that said, Tesla has demonstrated astonishing financial performance in recent years, growing 82.5% in 2018, 14.5% in 2019, 28.3% in 2020, 70.7% in 2021, and 51.4% in 2022. Most recently, revenues climbed again by 24% in the quarter year-over-year.
Over that same time frame, operating profit has climbed from negative $253 million to +$13.6 billion. For comparison sake, Alphabet produced $74.8 billion in 2022, Microsoft generated $83.3 billion, and Apple reported $119 billion. The market caps of these companies are $1.35 Trillion, $2.12 Trillion and $2.61 Trillion respectively.
So, can Tesla reach a $6 trillion market capitalization and hit $2,000 per share? Looking at how the market prices other companies producing massive EBIT, Tesla would need to produce close to $250 billion in operating income to earn Wall Street’s favor for a $6 billion market cap, and still have reasonable growth projections. Can it 20x operating income by 2027? Perhaps, but we wouldn’t bet on it.