Elon Musk congratulated team Tesla on March 9 via Twitter on delivering one million Tesla vehicles. Tesla is the most valuable and disruptive car manufacturer in the world. To learn more about Tesla and other disruptive technologies that will shape the digital economy, Ray Wang, CEO of Constellation Research, and I invited an autonomous vehicle investment analyst, from a research firm that only covers disruptive technologies, to our weekly show DisrupTV.
ARK Invest focuses solely on disruptive innovation and offers strategies to investors who seek to capture long-term capital appreciation and alpha. ARK seeks to identify disruptive innovation in the public markets. They research a global universe that spans sectors and market capitalizations to offer investment solutions with low correlation to traditional index-based strategies because they believe innovation is key to growth.
Tasha Keeney, CFA is an analyst for ARK's Industrial Innovation strategy and the 3D Printing ETF. Keeney covers autonomous cars, additive manufacturing, infrastructure development, and innovative materials. We invited Keeney on our show to discuss the long term view on Tesla, the impact of the health crisis on Tesla's future, and other important emerging technologies.
Impact of a health crisis, manufacturing trade wars, and likely scenarios post Coronavirus disease (COVID-19) on Tesla's future value projections?
According to Keeney, if we look at the auto industry broadly, we have already witnessed a slow down in sales, and now the auto incumbents have been struggling to develop electric and autonomous vehicles for the past few years. So the long term impact on autonomous EVs has been that we will see industry consolidation, and unsuccessful players will not be around the next 10 years. Since the COVID-19 event, Keeney believes that industry consolidation could accelerate. For companies like Tesla, they have their car manufacturing in China already operating. With Tesla broadly, they are the only car manufacturer in the world with cars that are equipped with bio-defense mode.
The long-range (5 years) view of Tesla
ARK recently published their long term view of Tesla with market cap and share price analysis for 2024. Here are some of the bear case, bull case, and likely scenario projections:
Tesla share price of 2024:
- Expected Tesla share value in 2024: $7,000
- Tesla share value - bear case 2024: $1,500
- Tesla share value - bull case 2024: $15,000
Tesla market value 2024:
- Expected Tesla market cap in 2024 - bear case: $300 billion (USD)
- Expected Tesla market cap in 2024 - bull case: $3 Trillion (USD)
ARK's research and modeling points to three key independent variables are critical to understanding Tesla's potential:
- Gross Margins – Will Tesla's cost of manufacturing vehicles continue to fall in line with Wright's Law? If so, what will be the average selling price of Tesla's vehicles?
- Capital Efficiency – What is Tesla's cost per unit to build new production capacity?
- Autonomous Capability – Can Tesla launch a fully autonomous taxi service successfully?
I asked Keeney if ARK believes that Tesla will be the first and only car manufacturer to reach the trillion-dollar market capitalization and $7,000 share price targets. ARK projects for the next 5 years are based on an estimate of 37,000,000 EVs sold globally by 2024. Keeney admits that ARK's forecasts are higher estimate that most, but the analysis is based on Wright's Law and lowering the cost of batteries. This steep cost decline will result in EVs being cheaper than a gas-powered car for a mass-market car, causing a major inflection point for demand. Tesla is the best position to take advantage of this inflection point. Tesla is also more capital efficient. And lastly, the autonomous technology, which is the most uncertain variable. ARK is assigning only a 30% likelihood that Tesla will launch an autonomous Taxi platform. That said, an autonomous taxi platform is a massive opportunity for Tesla - a market worth trillions of dollars.
"Wright's Law has forecast cost declines successfully in more than 60 technologies ranging from solar power to televisions, and from semiconductors to ovens. Tesla's Model 3 already has demonstrated cost declines in line with Wright's Law," Keeney. Based on Wright's Law in ARK's model, Tesla's auto gross margins could approach 40% in 2024.
The projections from ARK is based on several variables. The $15,000 Tesla share price bull-case is based on Tesla delivering 7 million vehicles per year. The $1,500 share price bear-case is based on 3 million cars per year. The bull-case also assumes Tesla will maintain its market share of 18%. The table below from ARK shows the variables and the ranges.
Tesla's Success Flywheel
I asked Keeney on how far Tesla is from their EV and autonomous car competitors with respect to innovation and overall capabilities. ARK's conservative estimate is that Tesla is at a minimum three years ahead of all its competitors. The biggest advantage for Tesla is the software advantage. The total vertical integration stack, and the over the air updates, is far ahead of other EV competitors. " An autonomous taxi network should provide Tesla with capital to invest in factories to produce more vehicles, which should lower production costs and expand Tesla's autonomous fleet," Keeney. The flywheel of success for Tesla is the demand for EVs, their factories and the potential network which will lead to new business models and revenue opportunities. More cars on the road, with more data and better systems, and lower total cost of ownership creates a growth snowball effect for Tesla.
"In previous versions of our valuation model, ARK assumed that the cash generated from autonomous taxis would build on Tesla's balance sheet. In this version of the model, ARK assumes that Tesla will invest any incremental cash in additional factories to scale EV production capacity and "accelerate the world's transition to sustainable energy," consistent with its mission statement," Keeney.
Keeney also believes that Tesla is a major threat to ride-hailing companies like Uber and Lyft. On a per-mile basis, it would be cheaper for autonomous cars to deliver ride-hailing. The long haul transportation with Tesla semi-trucks is also another opportunity. ARK research shows that autonomous electric trucks will make transporting goods cheaper than railways. The larger opportunity will be the passenger and consumer market. The bull-case scenario of $15,000 per share for Tesla is based on these autonomous EV ride-hailing opportunities.
Impact of COVID-19 on adoption and investments in new technologies
Keeney is seeing more autonomous product delivery companies, piloting and testing more deliveries. Drones delivery of goods and pilot cases will also increase due to social distancing. UPS is announcing the delivery of medical samples with drones. For 3D printing, ARK will anticipate parts shortages and supply chain challenges, therefore there will be an increase in additive manufacturing rapid adoption. AI adoption will also accelerate with smart robotics and the convergence of these technologies.
Keeney also talked about genomics, mobile payments and financial technologies like contactless payments, food delivery, and e-commerce, drone e-commerce delivery in the food space, and innovations in the last mile. Keeney also talked about the oil industry and its impact on the EV market. From a total cost of ownership, Keeney points to several advantages to EVs. To learn more, please watch the entire video with Tasha Keeney.