Tesla’s biggest bull stampedes to a $7,000 price target

A China-made Tesla Model 3 vehicle is seen at a delivery ceremony in the Shanghai Gigafactory of the U.S. electric car maker in Shanghai, China December 30, 2019.

A little over a year ago, when Tesla Inc. CEO Elon Musk publicly flirted with the idea of taking his company private, one investor wrote to ask him to reconsider.

According to research conducted by the investment firm, ARK Invest, “Tesla should be valued somewhere between $700 and $4,000 in five years,” wrote ARK’s chief investment officer, Catherine Wood. “Taking Tesla private today at $420 would undervalue it greatly.”

But anyone who thought that was a bold call hasn’t seen anything yet. On Saturday, ARK published an update to its Tesla TSLA, -0.12% valuation model, saying it now expects the stock to be worth $7,000 by 2024 — and that’s the base case. In a bull case, Tesla shares would trade at, or above, $15,000. The bear case puts the stock at $1,500, or about 2.5 times current trading levels.

What makes ARK so optimistic?

The investment team considers three big variables when analyzing Tesla’s business model: gross margins, capital efficiency and adoption of autonomous driving. ARK is most bullish on Tesla’s ability to cut costs and increase margins, assigning an 80% probability that the company will achieve 40% margins, “consistent with a dominant brand that is an innovation cycle ahead of commoditized competitors.”

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The analysts are least confident about autonomous technology adoption, saying there’s a 70% likelihood that Tesla will fail to create a fully autonomous car.

And as for capital efficiency, or how expensive it is to manufacture cars, the team is split, saying it’s just as likely that Tesla will be able to build factories for $11,000 per unit volume of capacity, as for $16,000. For context, the gas-powered auto industry average now is $14,000.

“The electric vehicle is going to drop below the price of a gas-powered vehicle, like-for-like, within the next 18 months to two years, and then will continue to fall,” Wood said in an interview on Barron’s Market Brief. “So, it’s going to be a no-brainer. Electric cars are going to be cheaper and they’re better cars, they’re better calls.”