Tesla’s share price — which closed 24% off its highs yesterday — saw a nice little bounce (though still down 24%) after ARK Investment management released its latest Tesla price targets for 2025.
The targets are not just unrealistic, they are laugh-out-loud unrealistic, almost to the point of being nonsensical. They offer three levels:
- “Bear case”: TSLA reaches $1,500 by 2025 (123% gain from the March 22 close).
- “Expected value”: TSLA reaches $3,000 by 2025 (348% gain from March 22 close).
- “Bull case”: TSLA reaches $4,000 by 2025 (497% gain from March 22 close).
For Tesla to fulfill the ARK bull case, it would need to have a greater than $3 trillion market cap in four years. The “expected value” case is a slightly lower hurdle, suggesting a market cap above $2 trillion.
Tesla, as of this writing, still doesn’t turn a profit by making cars. Its profitability to date comes from selling regulatory credits.
Meanwhile, the market cap of Volkswagen — either the No. 1 or No. 2 automaker in the world by volume, routinely competing with Toyota — is less than $200 billion as of this writing.
Here is another way to look at it: The total market cap for the 10 largest automakers in the world by valuation, excluding Tesla, comes to about $915 billion.
So, ARK expects Tesla — which had less than 1% of global auto volume in 2020 — to be worth more than double the total present value of the top 10 automakers in the world by 2025 — as an “expected value” case — and more than triple the top 10 as a bull case.
Again, this is not just outlandish — it is nonsensical.
In the past, we have joked that, in order to justify its loopy Tesla bullishness, ARK was factoring in the prospect of self-driving cars on Mars.
It turns out our joke was merely half a joke. The ARK price targets for 2025 are based on the assumption Tesla will dominate the self-driving taxi business — which, of course, does not exist yet — along with assumed production volumes of 5 million to 10 million vehicles per year.
Meanwhile, in the real world, Tesla delivered fewer than half a million cars in 2020, which means ARK is assuming a Tesla production ramp-up of somewhere between 900% and 1,900% — while somehow maintaining profit margins that justify a valuation 10 to 15 times higher than Toyota’s or Volkswagen’s (automakers who can already produce 10 million cars a year) — and further assuming Tesla will beat all other competitors to self-driving dominance, while pioneering a business model that doesn’t exist yet (the self-driving taxi business), in the face of self-driving challenges far more thorny than expected not just for Tesla, but the entire industry. (At the rate we are going, it could be 2030 before self-driving cars are well and truly a thing.)
Meanwhile, in the real world, it remains possible to fool Tesla’s self-driving software with a piece of black electrical tape applied to a road sign.
Pranksters demonstrated this by using a piece of tape to modify a sign that said SPEED LIMIT 35 MPH in such a way that Tesla’s cameras interpreted the “3” as an “8,” causing the vehicle to auto-accelerate to 85 mph in a 35-mph zone.
Elon Musk’s response to the above news on Twitter — we kid you not — was to reply with two laughing-face emojis: No text, and no sign of concern — just the two emojis.
Adding to the sense of “can this actually be real,” the wildly inappropriate Twitter response from Tesla’s CEO — or, Technoking, according to the recent SEC filing — came in the immediate aftermath of an incident in Lansing, Michigan, now being investigated by the National Highway Traffic Safety Administration (NHTSA), where a Tesla drove into a parked police car.
Here is the reporting from WLNS.com, the website of a local news station:
Michigan State Police said a Tesla on autopilot drove into a Lansing area trooper’s patrol car.
It happened around 1:10 on Wednesday morning as the trooper was investigating a car vs. deer traffic crash on I-96 near Waverly Rd. in Eaton County.
MSP said while investigating that crash with their emergency lights on, a Tesla on autopilot drove into the patrol car…
Laughing emojis indeed: This whole thing is nuts, and reminiscent of a zany comedy sketch. For those old enough to remember it, one can almost hear the “Benny Hill” theme playing in the background.
Then we remember there are true-believer investors with the bulk of their life savings wagered on Tesla, and we don’t know whether to laugh or cry (or both).
But, if you do have any money in Tesla, we urge you to erect a “volatility wall” now. ARK might need to act zany and irrational, but you don’t. Go here to start protecting your TSLA shares — and any other stocks that ARK might get their hands on.
In our view, the ARK price target is a form of rationalized insanity based on the fact that ARK is trapped.
You see, the entire ARK business model depends on the assumption that the sky-high valuations of stocks they own — not just Tesla but many others — will stay sky-high for the duration.
Not only that, in order to keep the game going, the valuations of these companies cannot just hang out around the moon; in order for ARK to keep delivering outsized returns in its ETF vehicles, those valuations have to soar well past the moon, far out into the solar system, and wind up on Mars.
As an investment shop, ARK has zero incentive to be rational.
Being rational would mean admitting that the entire speculative tech landscape got pumped up by trillions of dollars in emergency stimulus amid a “lower for longer” interest rate backdrop, via one-off pandemic conditions that will not be repeated.
Being rational would further require admitting, openly and honestly, that many of ARK’s favored names (including Tesla) could see their share prices fall dramatically from their peaks, by as much as 50 to 70% or even more.
Even the mighty Amazon saw a drawdown of roughly 95% between December 1999 and October 2001 — this is just the way of things.
But ARK does not have the option of being rational, you see, because acknowledging rationality would effectively be the same as telling their investor base to sell, which would potentially accelerate a tech valuation collapse driven by a powerful economic recovery (real growth crowding out speculative fever) and rising long-term yields destroying the “lower for longer” case.
In a strange way, then, the ARK price targets for Tesla are completely rational — but rational relative to the situation ARK is in, not the trajectory of Tesla’s share price over the next few years.
ARK has no business incentive to be logical with respect to Tesla’s prospects, and very strong incentive to perpetuate a fantasy on the hope that things miraculously work out; and so that is what they do.
One of the reasons we pound the table on this subject is not to dunk on ARK or make hay from their folly, but because we don’t like to see ordinary investors getting hurt.
Our strong hunch is that, when all is said and done, investors in the ARK family of ETFs will have collectively lost a larger sum than they gained, in terms of total absolute dollar amounts; a result like this is possible, or perhaps even likely, because the vast majority of billions flowed in at the end, when the valuations were highest and the timing was worst.
As for why the Technoking of Tesla (Musk, per his own anointed title) is posting laughing emojis in response to existential business risks, we’ve got no answer for that one — other than the possibility he is starting to crack under stress.