Technology disruption guru and ARK Investment founder Cathie Wood says her company will set a new price target for
stock soon. No one knows exactly when, but when it arrives it will be a big deal for Tesla fans.
The question for investors is what is the likely price of Tesla (ticker: TSLA).
Wood recently said Barron Jack Hough that the minimum expected return for a stock that enters his portfolio is 15% per year for five years. “That’s a doubling in five years,” Wood said.
That’s what 15% annually produces for five years. There is a useful rule of thumb on Wall Street known as the “rule of 72.” The number 72 divided by the annual rate of return gives investors the years it takes to own a double stock. It is an approximation, but quite a good one. At 15%, the rule in equation 72 gives 4.8 years. In reality, it takes about 4.96 years for an investment to double at 15% per year. Still not bad.
Wood told Hough that Tesla shares will do “substantially more” than the 15% rate of return in his most bearish case for Tesla shares at current levels. Exactly what substantially better means and what the current levels are is anyone’s guess. An annual return of 20% per year would produce a total return of about 150% for five years. That’s substantially more than the 100% who earned 15% a year for five years.
Looking at levels, Tesla shares have averaged roughly $ 650 over the past few days. That could mean that Wood’s bear case is about $ 1,600 a share by 2026.
That leaves investors with basic and bullish cases to investigate. Tesla shares have returned about 70% annually on average for the past five years. A repeat of that would put Tesla shares above $ 9,000 a share, making Tesla shares worth roughly $ 9 trillion. That could be too aggressive.
(AMZN) shares have returned around 40% annually on average for the past five years. If Tesla can achieve that return, its shares would reach around $ 3,500 by 2026. That would make Tesla shares worth roughly $ 3.5 trillion, which would be more than all other auto stocks combined by a factor of two. It may be wise to reduce that figure to $ 3,000.
Right in the middle of the bearish and bullish cases there is a good assumption for the base case. That makes $ 2,300 per share. At $ 2,300 by 2026, Tesla shares would have averaged about 28% annually.
Wood’s target price for Tesla shares in five years could easily be above $ 2,000. In 2018, Wood made a now legendary call that Tesla would hit $ 4,000. That was before the stock split 5 to 1. His call amounted to $ 800 a share, a level that Tesla reached in late 2020.
Going from $ 800 to $ 2,000 or more may seem like a stretch. How could things have improved much less than three years after the initial $ 800 call? Well, Tesla has made more money faster than expected, electric vehicle battery costs have continued to fall, and more automakers have committed to an all-electric future.
Things are better for electric vehicles.
Wall Street’s highest price target for Tesla is Piper’s Alex Potter at $ 1,200 a share. Wall Street price targets are typically where analysts expect prices to rise over the next 12 months.
Tesla shares have seen a small increase in velocity lately. Stocks are down about 15% so far this year, lagging behind returns on the
Dow Jones Industrial Average.
Business execution does not appear to be the problem. Fears of inflation and higher interest rates have affected the share prices of many high-growth stocks of late.
Tesla is a high growth company. It expects to increase volume by 50% per year on average for the foreseeable future.
Write Al Root at [email protected]