Are Tesla’s AI dreams already priced into its stock?

After an 82% year-to-date rally, Tesla shares trade at about 61 times forward earnings

Tesla chief Elon Musk has suggested the company’s value was almost fully dependent on cracking the code for self-driving. Reuters
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When it comes to Tesla and artificial intelligence, few are on the same page as Cathie Wood. According to the chief executive of ARK Investment Management, the electric carmaker is the biggest AI play, which will help its stock price rise to about $2,000 in 2027 from around $225 currently. The majority view on Wall Street is that potential is already incorporated in the company’s rich valuation.

“If you look at how other auto companies are priced and compare that with Tesla’s valuation premium, that delta shows you the AI opportunity is already priced in,” Catherine Faddis, senior portfolio manager at Fernwood Investment Management, said in an interview. “And it is not as if General Motors or Ford are not doing electric cars either, so that makes the valuation difference even starker.”

While Tesla is developing what is arguably one of the more ambitious AI projects – cars that can drive themselves – the stock’s hefty valuation premium leaves little room for investors who are trying to get in on the ground floor of an emerging new technology.

After an 82 per cent year-to-date rally, Tesla shares trade at about 61 times forward earnings, compared with the mid-to-high single-digit multiples of auto stalwarts General Motors and Ford Motor. Even current AI darling Nvidia trades at only 42 times.

Tesla chief executive Elon Musk himself suggested last year – long before the present rush for AI – that the company’s value was almost fully dependent on cracking the code for self-driving. “That really is the difference between Tesla being worth a lot of money and being worth basically zero,” he said in an interview in June last year.

The stock, while more than 40 per cent below its record highs of 2021, is still worth more than $700 billion, comfortably exceeding the combined market value of the six biggest global car makers, all of which have EV and self-driving efforts under way.

Tesla already offers a driver-assistance technology that it calls Full Self-Driving, even though a truly self-driving car has remained elusive for the industry. Ford and Volkswagen’s Argo AI shut down last year, while the initial excitement around Alphabet’s Waymo and GM’s Cruise has sputtered as well.

“Tesla’s AI is also a valid form of AI,” Nicholas Colas, co-founder of DataTrek Research, said in an interview. "But as we have found, it is much harder to drive a car from 57th Street to Wall Street in Manhattan, than it is to have generative AI write you a novel."

Still, as more investors start paying attention to companies exposed to the AI opportunity, believers in Tesla’s longer-term goals say it can be one of the best plays on the theme.

“Autonomous taxi platforms globally will deliver by 2030 $8 trillion to $10 trillion in revenue, from almost zero right now,” Ms Wood told Bloomberg TV. Her estimate of Tesla shares reaching $2,000 by 2027 is dependent on the EV maker playing a big role in that future. Without that AI push, Ms Wood expects the stock to be worth only about $400 by the same time.

A look inside Abu Dhabi's new Tesla taxis

A look inside Abu Dhabi's new Tesla taxis

Ms Wood does have some supporters, as the stock’s most recent rally also suggests. Tesla shares rose for a ninth straight session on Wednesday, the longest such streak since January 2021.

To Brian Mulberry, client portfolio manager at Zacks Investment Management, investors do not yet fully appreciate Tesla’s AI opportunities. He believes most of the company’s present valuation reflects its success in the consumer EV markets where it is the dominant player, and ignores other opportunities, including AI.

“Considering the current upswing in AI related names, we believe Tesla should enjoy participation in the excitement,” Mr Mulberry said.

Tesla was steady in premarket trading, with the stock reluctant to give back gains amid its longest winning streak since January 2021. Shares of the electric-vehicle maker jumped to a seven-month high on Wednesday, rising for a ninth consecutive session. They have been riding on insatiable investor appetite for mega-cap tech stocks and a string of recent positive news.

Updated: June 10, 2023, 3:00 AM