The now infamous ARK Invest updated its Tesla Inc (NASDAQ: TSLA) share price target on Friday – it's now more bullish than ever.
Cathie Wood and her team of analysts last year estimated the US electric vehicle (EV) maker's shares would eclipse US$1,400 by 2024. But, with updated research, the disruptive-focused asset manager now estimates it could hit US$3,000 in 2025.
Although a year later, the upgraded price target represents a 114% increase on the firm's prior base case and an implied 358% upside from Tesla's current price.
There are four main reasons for the revised price target.
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Less money, more production, higher Tesla share price
In ARK's 2025 Tesla share price target, the first reason listed for the target increase is refined capital efficiency. Originally ARK estimated that Tesla would spend US$11,000 to US$16,000 per unit of increased production capacity in 2024.
However, Tesla announced an anticipated 75% reduction in investment costs over time due to improved cell chemistry and manufacturing processes. Consequently, ARK has lowered its gross capital expenditure estimate per car.
For this reason, the asset manager now foresees sales somewhere between 5 to 10 million electric vehicles in 2025.
Take out a policy with Tesla
In August 2019, Tesla introduced its own vehicle insurance coverage for customers in California. These policies are provided through partnering with underwriters, but ARK believes Tesla could begin underwriting them itself in the next few years.
In addition to this, the margins on the policies are estimated to be better than average due to the detailed driving data available from the EVs.
ARK thinks the company could roll out the insurance offering to more states and acquire customers at a low cost, given Tesla's high safety profile and dynamic pricing ability. In this case, if Tesla sold 40% of its vehicles with its own insurance in 2025, insurance revenue alone could hit US$23 billion annually – and this is in ARK's bear case.
Did you request a Tesla for John?
Human-driven ride-hail is now incorporated into ARK's Tesla bear case share price. In the bear case, Tesla would deliver a ride-hailing service similar to that of Uber Technologies Inc (NSYE: UBER). However, Cathy Wood's team believes Tesla could do it with a lower cost structure.
If implemented, ride-hail could add US$20 billion to Tesla's operating profit by 2025, by ARK's estimates. This would also lay the groundwork for an autonomous service while providing a highly profitable recurring revenue stream.
Highest Tesla share price target = no human driver
Lastly, ARK's previous valuation model considered Tesla's chances of achieving fully autonomous driving before the end of 2024 to be 30%. The revised model has seen the team ambitiously raise the probability to 50% by 2025.
ARK estimates that if 60% of Elon's Autopilot-equipped EVs were to serve as robo-taxis', the company would generate an additional US$160 billion in earnings before interest, tax, depreciation, and amortisation (EBITDA) in 2025.
Furthermore, in ARK's targets, electric vehicle sales and robo-taxi business operations account for 40% and 50% of Tesla's estimated market capitalisation. Additionally, ARK estimates Tesla's combined operations to generate US$507 billion in revenue by 2025.
