Shares of electric vehicle (EV), energy storage, and artificial intelligence (AI) company Tesla (NASDAQ: TSLA) are trading down about 40% from their peak. Slumping sales in the company's EV segment, which currently provides the lion's share of its revenue and earnings, have dampened Wall Street's enthusiasm for the stock, despite the company's potential in robotics and autonomous vehicle technology.
However, Cathie Wood, who manages billions of dollars for Ark Investment Management, is buying Tesla stock hand over fist for her firm's exchange-traded funds (ETFs). Since the end of 2023, Ark's total Tesla position has grown from 3.8 million shares to 5.3 million.
Wood built her reputation in part on her foresight about Tesla stock. So should investors follow her lead now and buy it for its alleged AI upside?
Wood has won big on Tesla before
Wood founded Ark Invest in 2014. The firm operates several actively managed exchange-traded funds (ETFs), most of which focus on various categories of growing, innovative companies. Its flagship fund is the Ark Innovation ETF. Between 2017 and 2019, Wood invested heavily in Tesla, which was at the time fending off bankruptcy as it ramped up Model 3 production.
Tesla worked through its challenges, the business thrived, and the stock gained nearly 1,500% over three years beginning in January 2019:
But Ark's reputation has suffered since then. Market sentiment about speculative growth stocks plummeted as the Fed boosted interest rates to fight inflation, and their valuations plunged too. Many of Ark's holdings remain down significantly from their former highs. The Ark Innovation ETF has dramatically underperformed the S&P 500 since early 2022.
Now, however, Wood appears to be leaning into Tesla once more, hoping for a big win to get her funds back on track. Her new investment thesis for Tesla credits it with eye-popping investment potential.
Why Wood thinks it will happen again
Ark updated its long-term Tesla forecast this year, pegging its expected value in 2029 at $2,600 per share. That's over 10 times the company's value today.
Both CEO Elon Musk and Wood have high hopes for Tesla's autonomous driving technology. On the Q2 earnings call, Musk went so far as to say that investors should sell their Tesla stock if they don't believe the company will be able to bring a self-driving EV to market, because "the value of Tesla overwhelmingly is autonomy." Likewise, Ark's projections estimate that approximately 90% of Tesla's enterprise value and earnings will derive from autonomy by 2029.
Autonomy, also called full self-driving, would create high-margin revenue opportunities for Tesla, potentially offsetting the impact of lower-margin electric vehicle sales. It could launch a robotaxi business that could threaten traditional ride-sharing models by dramatically reducing operating costs. Tesla plans to unveil its robotaxi EV in October.
Tesla has been developing this technology for the past decade, but strides in AI over the past couple of years have accelerated its progress. The company's version 12 software is allegedly a tremendous improvement; Tesla rewrote its software to use neural net technology instead of code to interpret the vehicle's surroundings.
Should investors buy Tesla today?
Tesla is arguably overvalued today based on its recent earnings. However, the company's lofty goals and public profile have won it an investor base that seems to focus more on its long-term story than its quarterly financials. That doesn't mean shareholders are misguided; Tesla is notorious for missing promise dates, but it has eventually delivered often enough that the stock has outperformed the market.
Elon Musk is arguably Tesla's greatest long-term advantage and risk. Musk built Tesla into what it is today. On the other hand, Musk is a highly public and outspoken figure who occasionally attracts criticism that unnecessarily exposes Tesla to bad publicity. It's an unfair and frustrating situation for shareholders who must take the good with the bad. In June, investors voted to reinstate Musk's $44.9 billion pay package, a sign that shareholders still feel Tesla is better with Musk than without him.
So, should investors buy Tesla today? It boils down to a simple question: Do you believe the company will deliver autonomous driving technology to the market?
The bottom line is that Tesla is a stock with a wide range of potential long-term outcomes. Maybe Ark's projections are over-optimistic. Even so, Tesla shares could still deliver strong returns from here if the company produces an autonomous driving system that meets regulators' (and customers') standards, and launches a robotaxi service. However, investors should also acknowledge the risks and downsides if it fails to clear the remaining technological hurdles.
Those who believe in Tesla's autonomous driving vision should consider building their positions in the stock slowly and steadily using a dollar-cost averaging strategy. They should also hold it as a small part of a diverse portfolio. If Ark's projections prove even remotely close to accurate, you won't need much Tesla stock to enjoy portfolio-changing returns.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
Ark's Cathie Wood is Buying This Top Artificial Intelligence (AI) Stock Hand Over Fist was originally published by The Motley Fool