When investors think about artificial intelligence (AI) stocks, the semiconductor giant Nvidia Probably top of mind. AI data center chips are now responsible for most of the company’s growth and have driven a whopping 238% increase in the stock price in 2023.
But when Cathy Wood thinks about the biggest opportunities in AI, there’s a different stock on her list. In an interview with Bloomberg TV, she said investors should look to AI software companies because they can earn $8 for every $1 in chips sold by Nvidia.
With that in mind, says Wood Tesla (TSLA -0.17%) Currently the biggest AI play. You might know the company for its globally dominant electric vehicles or its eccentric CEO Elon Musk. But I’ll explain why Wood — and her investment firm Arc Investment Management — believe autonomous self-driving software is on track to become Tesla’s most lucrative opportunity.
If Arc is right, Tesla’s stock could soar and make the company one of the highest valuations in the world.
Image source: Tesla.
Electric vehicles are a path of great opportunity for Tesla
Tesla dominates the electric vehicle market. In fact, its Model Y was the best-selling car worldwide in the first quarter of 2023. All By the end of the range 2023, Elon Musk estimates that the company will have produced more than 1.8 million vehicles a year, which would be the highest mark ever.
But Tesla is just getting started. Musk wants to increase production at a compound annual rate of 50% for the foreseeable future, and the company could make 20 million cars annually from 12 Gigafactories around the world by 2030. Its production efficiency is unmatched in the automotive industry as a whole and it maintains the highest gross profit margin of any car manufacturer. It rose to 18.2% in the second quarter.
While that’s still industry-leading, that margin is narrower than the same time last year as Tesla has cut prices for its cars to boost demand in the current economic climate. Consumers are spending less money on big-ticket items like new cars due to inflation and rising interest rates. But since Tesla is the only profitable pure-play electric vehicle manufacturer, it can afford to go to war with rivals on price.
But there’s another reason Tesla wants to flood the market with cars by lowering prices. In an interview with CNBC’s David Faber in May, Musk said the company could theoretically sell its cars at breakeven and still make a lot of money. How? In the near future, every Tesla vehicle could serve as a vessel for the company’s autonomous driving software, powered by artificial intelligence.
Its gross profit margins have the potential to skyrocket because software can be developed once and sold an unlimited number of times.
Self-driving software could change Tesla’s economics
Arc Invest estimates that more than 2.7 million Tesla customers in the real world are testing the beta version of the full self-driving (FSD) technology. That’s 10 times more than its nearest competitor, and Musk says those customers have traveled more than 300 million miles to date.
Tesla plans to monetize the software in three ways:
- First, Tesla will sell FSD to customers on a subscription basis. With software products often having gross margins as high as 80%, it can be a huge cash generator.
- Musk is exploring the possibility of licensing FSD technology to other car manufacturers for a fee. Not only will this create a new revenue stream, but it can help improve the software greatly. The more the car is used in the real world, the more data it collects and the smarter its AI models become.
- Ultimately, Musk wants to build an autonomous ride-hailing network, and it could be the most lucrative revenue stream in the company’s history.
Musk says the average passenger vehicle is in use for just 12 hours per week, meaning it spends most of that time parked at the owner’s home or workplace. FSD will enable that owner to loan their car to Tesla’s autonomous ride-hailing network to generate additional revenue, of which Tesla will receive a cut.
Musk believes that the combination of software sales and autonomous ride-hailing could increase the production of each Tesla vehicle to an unprecedented 70% in the long term. So, even if Tesla makes no difference to the production and sales of each car, the accompanying services will make the company a cash-generating machine.
Tesla stock could rise to $2,000 by 2027, according to Arc Invest
Arc Invest estimates that the autonomous ride-hailing industry alone will generate $4 trillion in revenue over the next five years. It’s a bold call considering it practically doesn’t exist today, but Tesla says its FSD software could be publicly available by the end of 2023.
The extract details how the new industry will change Tesla’s business. While electric vehicle sales account for more than 85% of the company’s revenue today, they could drop to less than half by 2027. That’s because autonomous vehicles — often called robotaxis — will represent 44% of revenue in Ark’s financial models.
In 2027, Arch believes Tesla’s total annual revenue will top $1 trillion, bringing its enterprise value to a whopping $6 trillion. This would translate to a stock price of $2,000, a whopping 716% increase from where it trades today.
Before investors get too excited, one caution is in order. Ark estimates that Tesla will grow revenue by 78% annually between now and 2027. That would be an impressive feat for any company, but it would be incredible for one that already generates nearly $100 billion in revenue on a trailing-12-month basis. It’s possible that Ark’s expectations are a little too optimistic.
But it’s unknown how quickly autonomous driving will take off. If it develops into a multitrillion-dollar industry over the course of a few years, Arc’s $2,000 estimate for Tesla stock might be right on the money.