Investors frequently discuss whether Tesla (TSLA 1.06%) is simply an electric carmaker posing as an artificial intelligence company or a real artificial intelligence company that also manufactures electric vehicles. For Morgan Stanley analyst Adam Jonas, there is no question Tesla fits into the latter classification. His certainty is emphasized by a bullish price target of $500 per share, suggesting 170% upside from its current price.
Here’s what investors should be aware of regarding Tesla and its AI aspirations.
Tesla faced economic challenges in 2023, and prospects may not improve in 2024
Tesla revealed disappointing financial results for the fourth quarter, failing to meet expectations on both the top and bottom lines. Overall revenue only saw a 3% rise to $25.2 billion as high interest rates suppressed demand for electric vehicles. Furthermore, non-GAAP (adjusted) net income plummeted 39% to $2.5 billion due to price reductions aimed at stimulating demand, leading to significant margin compression.
Additionally, while Tesla does not offer precise guidance, management cautioned that volume growth could be much slower this year as it focuses on its next-generation vehicle. For context, Tesla delivered 1.81 million vehicles last year (up 38%), and produced 1.85 million vehicles (up 35%).
Tesla’s stock has fallen by 26% year to date due to the combination of disappointing fourth-quarter results, concerning guidance, and allegations of drug use by CEO Elon Musk and certain board members. However, Wedbush Securities analyst Dan Ives argues that this story ultimately amounts to “noise for the stock.” The long-term investment thesis remains unchanged, and the recent decline creates a buying opportunity for Tesla enthusiasts.
Tesla has the potential to become more profitable as it emphasizes artificial intelligence
Tesla is the dominant player in battery electric vehicles, and the company has promoted its once industry-leading operating margin as evidence of superior manufacturing technology. Margins have since decreased as price reductions have eroded profitability, but Tesla still excels in the manufacturing realm.
Tesla produces battery packs (the most expensive part of an electric car) at a lower cost per kilowatt hour than its competitors, and Cairn Energy Research Advisors predicts the company’s leadership will continue through the end of the decade. Furthermore, Tesla will utilize a new manufacturing system that could halve production costs to produce a next-generation vehicle in late 2025. This vehicle, which could start as low as $25,000, has two implications for investors.
First, costs associated with the production ramp will weigh on profitability in the short term. Second, the lower price could significantly boost demand in the long term, creating more opportunities for upselling with related products like full self-driving (FSD) software. Tesla already sells FSD beta subscriptions in some regions, but the company plans to monetize the software through licensing agreements and robotaxi services in the future.
Tesla holds a strong position in the growing autonomous vehicle market, as it has more autonomous driving data than its competitors. To elaborate, the company has an increasing number of FSD-enabled cars on the road, and each one enhances its ability to collect training data for the underlying artificial intelligence (AI) models. Tesla aims to expedite the timeline to full autonomy with Dojo, a supercomputer designed specifically for training computer vision systems, which could itself become a revenue stream in the future.
In the end, Musk believes FSD could elevate Tesla’s gross margin to 70% in the future, up from 18.2% last year. Morgan Stanley analyst Adam Jonas is equally optimistic about related mobility and network services. He attributes more than half of his $500 per share price target to products like FSD software, robotaxi services, paid charging, insurance, and AI cloud services through Dojo. Jonas believes those offerings will position Tesla in front of a $10 trillion addressable market by 2030.
Evaluating Tesla stock is challenging because the investment thesis is somewhat theoretical
According to Grand View Research, electric vehicle sales will grow 15% annually through 2030, while the autonomous vehicle market will expand at 22% annually during the same period. However, valuing Tesla’s stock is difficult due to a significant portion of the bullish thesis being based on products that are either partially or entirely theoretical. Even Wall Street struggles to pin down estimates.
Indeed, the Wall Street consensus expects Tesla to achieve sales growth of 18% annually over the next five years, but that figure encompasses a wide range of estimates. For example, Adam Jonas of Morgan Stanley anticipates Tesla to achieve sales growth of 23% annually over the next eight years. In both instances, those estimates make the current valuation of 6.7 times sales appear attractive, but investors should keep in mind that AI software and services are integrated into the Wall Street forecasts to varying extents.
Investors who lack confidence in that narrative should steer clear of Tesla. There are numerous other AI stocks worth investing in. Alternatively, Tesla enthusiasts should consider purchasing a small position in the stock now, but not with the expectation of a 170% return in the near future. That is highly unlikely given the challenging industry climate and negative sentiment surrounding the stock. However, give it five to 10 years, and Tesla could generate a return of that magnitude or higher.