Back in June, ARK Invest suggested that the Tesla (NASDAQ:TSLA) share price could reach $2,600 by 2029. A lot of their thesis was based on the company’s robotaxi business.
With less than a month to the (rescheduled) unveiling of Tesla’s robotaxi, now seems like a good time to take another look at the ARK thesis. Should investors be snapping up the stock today at $230?
Robotaxis… finally?
Tesla was supposed to unveil its robotaxi back in August. That didn’t happen, but the revised date is now less than a month away.
It might be difficult to overstate the importance of this for investors. ARK’s view is that 90% of Tesla’s earnings will come from its robotaxi business by 2029 – without this, things look a lot less positive.
Without a robotaxi service, Cathie Wood’s firm sees the stock being worth $350 five years from now. And that’s based on a human-driven ride-hailing service, that Tesla hasn’t shown much interest in.
ARK estimates the probability of Tesla not having a substantial robotaxi business in 2029 is less than 1 in 10,000. But I think investors should consider carefully the implications of this.
Regulation
The biggest issue, I think, is regulation. It’s the main obstacle to launching a fleet of robotaxis that (i) could seriously delay or even block the entire operation and (ii) isn’t under Tesla’s control.
I think estimating the chances of the company getting regulatory approval for its autonomous vehicles by 2029 is difficult. That’s especially true for someone outside the company.
In that situation, the best thing to do is look for a margin of safety. But ARK’s $2,600 price target implies a 99.9% probability of success for Tesla and that’s without considering any other risks.
That strikes me as bold to say the least. And while other autonomous vehicle businesses have been making progress, this isn’t automatically a good sign for Tesla.
Competition
Alphabet’s robotaxi business Waymo has already had some success with regulators. As a result, it has 700 autonomous vehicles already on roads.
Waymo’s approval, however, doesn’t mean something similar is imminent for Tesla. Where Waymo uses lidar, Tesla’s robotaxis rely on cameras, ultrasonics, and radar to get around.
Elon Musk says Tesla’s system is easier to scale than a lidar setup and would even work on a different Earth. But that’s not much use in getting past regulators, who are mostly interested in this planet.
Ultimately, Tesla is going to have to show that its system is as safe as – if not safer than – Waymo’s for regulators to sign it off. And that might not be entirely straightforward.
The big question
I agree with a lot about ARK’s outlook for Tesla. The company’s prospects look much brighter if it can successfully launch a robotaxi network in the next five years than if it can’t.
I think the question of regulatory approval is a lot more complicated than the analysts at ARK do, though. And that makes me fundamentally more cautious.
I’m not convinced that the right probability to assign to Tesla launching its robotaxi network in the next five years is above 99.99%. That’s why my own price target for the stock is much lower.
