Key Points
From some perspectives, Tesla (NASDAQ: TSLA) looks outrageously expensive. For example, its shares trade at nearly 14 times sales. For comparison, Rivian, another popular electric vehicle (EV) stock, trades below 4 times sales.
To be clear, I’m a big fan of Rivian. I think shares are ridiculously cheap with 1,000% upside potential. But I also think Tesla shares are cheaper than a first glance indicates.
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That’s because the EV maker is chasing growth opportunities that few of its competitors can target. One opportunity in particular could add at least $1 trillion in value to the company’s market cap, resulting in nearly 100% upside potential from today’s prices.
This is Tesla’s next $1 trillion opportunity
It’s clear that Tesla is no longer being valued solely as an automotive stock. Few if any other auto stocks have ever been valued above 10 times sales, especially as mature businesses.
The shares look expensive because they are pricing in a lot of future growth. But this growth doesn’t necessarily relate to its existing vehicle manufacturing business. Auto sales for the company are actually in a multiyear decline. Why, then, are shares priced at such a premium? One word: robots.
The business is now undergoing a huge pivot. Instead of scaling up EV production, it is looking to start producing brand new product lines. One of its Texas factories, for example, is expected to focus on building its Optimus robot: a two-legged autonomous humanoid robot designed for both industrial and consumer applications.
According to one report, management is already phasing out the Model S and Model X to make room for a first-generation robotics plant capable of manufacturing one million units annually. The long-term goal is to produce 10 million of these robots annually.
Tesla semi trucks. Image source: Tesla.
Robots capable of doing manual labor could be a big market for Tesla. But that’s actually not the market I’m most excited about. In the long term, robotaxis could be a much bigger opportunity.
Market forecast estimates for the robotaxi market — ridesharing powered by self-driving vehicles — are all over the place. On the bullish end of the spectrum is Ark Invest’s outlook, which says the global robotaxi market could eventually reach trillions in value.
Ark CEO Kathie Wood says: “We think $8 trillion to $10 trillion for the entire autonomous taxi opportunity throughout the world, from almost nothing. That’s how quickly AI is going to cause these things to happen.”
Wood’s firm is heavily invested in Tesla stock. Within five years, she predicts, more than 90% of the company’s value will be tied up in its robotaxi division. Other bullish analysts agree. Dan Ives at Wedbush Securities, for example, thinks robotaxis could add $1 trillion to the company’s market cap by the end of 2026.
Other market forecasts, however, aren’t nearly as bullish. Fortune Business Insights, for example, believes theglobal marketwill only be worth $96 billion by 2034. That still calls for plenty of growth, but not nearly what analysts like Ives and Wood expect.
This is the bet for investors right now: How quickly will the robotaxi market materialize? If it’s slower than expected, other Tesla competitors have a chance to catch up both in terms of automaking and self-driving capabilities, rendering Tesla’s premium valuation overly bullish.
But if robotaxis ramp up globally over the next few years in a meaningful way, we could see that market account for a vast majority of the company’s valuation, as Wood predicts. In this case, it’s not hard to see Tesla taking an outsize market share. With perhaps a $10 trillion opportunity ahead of it, the stock might prove shockingly cheap at today’s valuation under this scenario.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
