Cathie Wood Thinks This Artificial Intelligence (AI) Stock Can Soar 1,082%. Here’s Why I Think It Can Go Higher.

2024 has been a tumultuous year for Tesla (NASDAQ: TSLA) investors.

In the first six months of the year, the company’s shares drastically underperformed S&P 500 And Nasdaq Composite as shares tumbled about 20%. Still, longtime Tesla bull Cathie Wood of Ark Invest recently revised her price target on the EV stock. Wood sees Tesla shares hitting $2,600 by 2029 — up 1,082% from recent levels.

While some investors may find this prediction ridiculous, I personally think Wood understates Tesla’s prospects.

Wood’s thesis revolves around robotaxis, but…

Tesla is a pioneer among electric vehicle (EV) manufacturers. After making significant progress in recent years, the company is now laser-focused on what it expects to be its next chapter: autonomous driving technology.

CEO Elon Musk is so impressed with the potential of autonomous driving that he said during the company’s latest earnings call, “I would recommend that anyone who doesn’t believe Tesla will solve autonomy for vehicles not own Tesla stock. They should sell their Tesla stock. If you believe Tesla will solve autonomy, you should buy Tesla stock.”

That’s a polarizing statement, but it’s pretty much on par with Musk’s course. He’s not the only one with a strong belief that autonomous driving is a huge opportunity, though.

In Wood’s latest model, she predicts that subscriptions to Tesla’s autonomous driving software — called full-self driving (FSD) — will be the primary catalyst for the company’s future growth. In essence, FSD represents a source of high-margin, recurring revenue for its EV operation.

Furthermore, if Tesla becomes the best developer of self-driving technology, it has a huge opportunity to change the market for car rental companies, delivery services and taxi services, for example.

While I understand the opportunities FSD presents, I think Wood underestimates Tesla’s long-term potential.

…what about robotics and energy storage?

Autonomous driving is just one extension of the EV business. But at a deeper level, FSD is an advanced application of artificial intelligence (AI). While Musk and his team remain steadfast in their FSD efforts, Tesla has much grander ambitions in the broader AI domain. In particular, it is developing a line of humanoid robots called Optimus. The idea is that it could improve its efficiency and productivity by augmenting its human workforce with Optimus robots.

If this effort is successful, Tesla would have an incredibly lucrative opportunity to commercialize Optimus and sell robots to other companies. This could revolutionize the labor market — and Wood’s model doesn’t seem to account for that potential.

The story continues

The main reason Wood isn’t putting much stock in Optimus right now is that she believes commercialization of the robots is still five years or more away. But at the risk of being overly Pollyannaish, I think Wood might want to reconsider that position. During Tesla’s second-quarter earnings call, Musk said, “We expect to have produced several thousand Optimus robots doing useful things in Tesla factories by the end of next year.” He went on to predict that the company would “ramp up production significantly” and sell them to outside customers by 2026.

In addition to its AI initiatives, Tesla has already built a thriving energy storage business, which in my opinion is seriously undervalued.

The table below shows the financial results of Tesla’s energy generation and storage segment over the past few quarters.

Data source: Tesla.

Tesla has doubled its revenue from its energy storage business over the past year. But even more impressively, it has achieved strong unit economics, supported by a consistently growing gross margin profile.

This dynamic is important because growth in the energy storage segment helps offset the stagnation and decline in its core electric vehicle business. Moreover, because Tesla is generating strong and growing profits from its power generation unit, it can still invest in key growth initiatives, particularly in AI.

Looking at Tesla’s valuation

One thing that Wall Street analysts can’t seem to agree on is Tesla’s valuation. And on the surface, I totally get it. Its market cap is currently about $700 billion — nearly 16 times that of ford and 14 times as large as General Motors. That is not correct in principle.

But like Wood and Musk, I see Tesla as much more than a car company. Investors need to look at the different parts of the overall operation and analyze their valuations individually. This is often called a sum-of-the-parts valuation.

Beyond the EV segment, the company is making progress in two areas with strong secular tailwinds: AI and renewable energy. Granted, it has yet to truly monetize its AI products on a large scale, so I understand if pessimistic investors remain skeptical. But as a Tesla shareholder for many years, I have strong faith that the company will continue to make progress toward FSD. Moreover, I believe that success in FSD will lead to increased demand as the company attempts to differentiate its fleet from the competition.

Additionally, I am drawn to the Optimus case and agree with Musk that these robots will be commercialized sooner rather than later. Finally, the energy storage sector is growing faster than any other part of the business and I don’t see demand in that space slowing down anytime soon.

Whether the stock hits Wood’s price target on her forecast chart is irrelevant. Over the long term, Tesla has a lot of opportunity to disrupt multiple markets beyond EVs, and I’m bullish on its prospects for executing on its vision. For these reasons, I think Tesla is a strong buy for investors with a long-term horizon.

Should You Invest $1,000 in Tesla Now?

Before buying Tesla stock, here’s what to consider:

The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Tesla wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.

Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $635,614!*

Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.

View the 10 stocks »

*Stock Advisor returns as of July 29, 2024

Adam Spatacco has positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.

Cathie Wood Thinks This Artificial Intelligence (AI) Stock Can Soar 1,082%. Here’s Why I Think It Can Go Higher. was originally published by The Motley Fool