2020’s rockstar fund manager, Cathie Wood, has set a new price target for electric vehicle producer Tesla. In particular, Cathie Wood’s flagship fund ARK Innovation had a spectacular 2020, generating returns of close to 150%. The fund’s largest holding, Tesla, increased close to ten-fold for the year and other emerging tech shares increased significantly as growth stocks took centre stage.
Tesla’s valuation is always a contentious topic, with analysts all over the globe divided regarding the worth of the business. The company has a valuation around $600bn and is one of the largest businesses by market capitalisation in the world. The company’s price-to-earnings multiple stands at over 1,000, which means that investors are paying approximately $1,000 in value for $1 in earnings. However, the reason that growth stocks trade at lofty valuations is because of the future earnings, or the perceived future earnings that will be able generated in the future.
For instance, Tesla’s margins on electric vehicles are around 25% to 30%. However, if Tesla manage to invent autonomous vehicles (self-driving cars), which the market is pricing into its current valuation, the margins will be approximately 80%. As we have seen over the past six months, almost all automative companies are ramping up electronic vehicle production. But, Tesla isn’t an automative company, it’s a technology company. This gives Tesla the edge in producing autonomous driving vehicles before the rest of the competition.
Many analysts have called ARK’s $3,000 price target on Tesla by 2024, crazy. Some have even described it as market manipulation. Cathie Wood, given the exceptional returns she has managed to generate has gained a somewhat Elon Musk like cult following.
Read also: Alec Hogg: Brace yourself, more bumps for tech stocks
Christopher Bloomstran, president and chief investment officer of Semper Augustus Investments Group, a US based investment house, outlines the fundamentals behind the $3000 price target, calling it nothing but a fantasy.
I see lots of student company write-ups and pitches. Most are better than yesterday's $3,000 ARK Price Target Report for $TSLA. In reading the report its clear the motivation is to promote a higher stock price. The fantasy involved is simply spectacular… 1/
— Christopher Bloomstran (@ChrisBloomstran) March 20, 2021
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