If you think Kathy Wood's target price of $2,600 for Tesla (TSLA.US) is already aggressive, then listen to what Tesla CEO Elon Musk thinks about Tesla's future valuation, which will surprise you.
Wood's target stock price for 2029, published on Wednesday, calculates Tesla's market capitalization to be about $8 trillion, with the automotive company accounting for just over $1 trillion and autonomous driving technology accounting for $5 trillion or more, with the rest distributed in Tesla's other businesses, including stationary electricity storage.
According to the Eastern Fortune APP, Musk expressed his agreement with her autonomous driving views at the company's annual shareholders' meeting on Thursday, adding that the humanoid robot business may be even bigger. Tesla is developing a labor-efficient humanoid robot, Optimus, trained by artificial intelligence, which can be used for factory assembly around the clock as well as in homes to make life easier.
He said: "I think when we achieve large-scale production, Tesla can basically derive about $1 trillion in profit annually from Optimus. If the price-earnings ratio is about 20 to 25 times, this means that Optimus's single business is worth $20 trillion to $25 trillion."
Building on Wood's autonomous driving technology valuation, Musk believes Tesla could be a $30 trillion company. That would make his personal net worth around $6 trillion.
This number sounds like a fantasy. But Future Fund Active ETF co-founder Gary Black did the math. He estimated that global demand for robots is roughly 100 million units per year, with a price of about $20,000 per unit (a price roughly between that of smartphones and autos). Achieving the $1 trillion profit Musk mentioned requires a 50% operating profit margin. If Musk meant net profit margin, the operating profit margin would need to be higher.
This is indeed quite aggressive. In 2024, Apple's (AAPL.US) operating profit margin is expected to be 31%, while Tesla's operating profit margin is expected to be around 8%.
Musk may be better off focusing on a more direct goal of reaching a $1 trillion market capitalization again. At the end of 2021, when Tesla's stock price reached about $340, the company hit this milestone for the first time. With more shares now outstanding, reaching a $1 trillion market capitalization again would require a share price of around $313, according to FactSet data.
Achieving this goal may be more of a profitability story than a price-earnings ratio story. Tesla's stock is now trading at about 55 times expected earnings in 2025, lower than the 100 times expected earnings at the end of 2021 and 2022; investors may not expect the P/E ratio to return to triple digits.
If Tesla wants to reach a $1 trillion market capitalization while maintaining a P/E ratio of 55, it would need earnings per share of about $5.6 in 2025. In 2022, the Wall Street consensus estimate for 2025 EPS was close to $8. Now that estimate has fallen to about $3.3.
As with manufacturing robots, increasing sales and improving profit margins is crucial for Tesla's stock. By the close of trading on Friday, Tesla fell 2.44% to $178.01.
Since the approval of the compensation plan, Tesla's stock has only risen a few dollars, which is somewhat unexpected.
Investors may be concerned that the new vote will not be enough to overturn the January invalid ruling by the Delaware court. This concern seems overblown. Delaware's decision suggests that if there is appropriate disclosure, Tesla shareholders would vote to reject this proposal, according to Natela Shenon, a partner at the Los Angeles law firm Grant | Shenon. "Now that shareholders have voted for this proposal for the second time with all the facts out, the core of the judge's argument has become moot. Whether Judge McCormick considers this shareholder vote and overturns this decision depends on whether she applies the law neutrally and fairly...she should have no reason not to overturn this decision."