On June 13, I posted a story claiming that the massive increase in market cap to $3.1 trillion made it virtually impossible for Nvidia to grow its sales and profits at the lightning pace needed to reward shareholders.
The same day, Cathie Wood, head of Ark Invest, appeared on CNBC to defend her company’s new, breathtakingly bold projections for Tesla’s stock price. Wood said the EV leader’s shares would reach $2,600 by 2029, nearly fifteen times the current level of $175. In a report issued the previous day, three Ark analysts detailed the financial numbers Tesla is expected to achieve in five years that justify the unprecedented moonshot in value. Their work impressed Tesla CEO Elon Musk, who tweeted: “I think it’s worth looking at Ark’s analysis, I think it’s the most accurate analysis.”
Nvidia’s challenges versus Wood’s stunning new Tesla prophecy
When we compare the feats Nvidia must achieve to prove a good investment, and the performance Wood expects from Tesla, her prediction resembles the greater fantasy
In the Nvidia piece, I argued that in order to deliver a relatively modest 10% annual return to its shareholders over the next seven years, Nvidia would most likely need to double its market cap to $6.2 trillion by 2031. I’ll spare you the details , but I estimated that getting there would require $200 billion in annual net profits and $580 billion in revenues by the end of that time frame, for 25% and 50% annual increases, respectively. Conclusion: The likelihood that the numbers now being posted by companies like Apple, Microsoft and Alphabet will decrease is slim, to say the least. Simply put, investors have set the bar so high for what the AI pioneer needs to achieve that it will very likely turn out to be a great company and a bad investment.
The Ark Report predicts that Tesla will reach an “enterprise value” of $8.2 trillion in five years. While enterprise value includes both debt and equity, Ark appears to attribute almost all of that number to the latter. Therefore, it says that Tesla’s market cap will be a third higher than the required but fantastic $6.2 billion bogey for Nvidia in my “roadmap to success”, and that this will happen much faster, in five years instead of seven! Tesla enters the race with a severe handicap: It has earned just $13.7 billion over the past four quarters, a third of Nvidia’s $42.6 billion.
According to the Ark analysis, Tesla’s profits will be around $300 billion in 2031. Getting there would require an annual gain of 90% through 2029. That’s almost four times the hurdle for Nvidia. Ark projects sales of $1.2 trillion for Tesla at the end of the five-year period; to ring the bell would require a 65% annual increase, a growth rate much faster than the 50% needed to make Nvidia a decent buy at these prices.
Based purely on the scale of the numbers compared to what other tech moguls have amassed and the size of Tesla’s industry, Ark’s estimates seem far more outrageous than the exaggerated numbers baked into Nvidia’s valuation. That $300 billion in profits by 2029 would be three times what Apple makes now, and its $1.2 trillion in revenue would be five times what Microsoft makes. Tesla’s sales in 2029 would equal the combined total of the world’s five largest automakers: Volkswagen, Toyota, GM, Ford and BMW. At a market capitalization of $8.2 trillion, Tesla would be worth four times the all-in valuation of the global auto industry.
The goals investors have set for Nvidia, and Wood’s astonishing prospects for Tesla, are based on the vision that a single player will dominate a revolutionary industry, with little competition, virtually forever. For AI giant Nvidia, that domain is already exploding, but what is in doubt is the prospect of eternal dominance. For Tesla, the business – robo-taxis running on its super-lucrative software – doesn’t exist yet, and if and when it will arrive, how profitable it will be and whether King Elon can rule it alone are all big questions.
You have to marvel at Wood for making a call that looks ridiculous based on anything we’ve ever seen in the financial markets, and Musk for praising the “analysis” behind the gravity-defying target. They may be true believers, but investors have to do the math.
This story originally appeared on Fortune.com
