On June 13, I posted a story asserting that the giant increase in its market value to $3.1 trillion made it virtually impossible for Nvidia to grow its sales and profits at the lightning pace needed to reward shareholders.
That same day, Cathie Wood, the head of Ark Invest, appeared on CNBC to defend her firm’s bold new projections for Tesla’s stock price. Wood posited that the EV leader’s stock would reach $2,600 by 2029, almost fifteen times its current level of $175. In a report published a day ago, three Ark analysts provided the financial metrics that Tesla expects to reach in five years, thus justifying the value of that unprecedented moonshot. Their work impressed Tesla CEO Elon Musk, who tweeted: “I think the Ark analysis is worth looking at, I think this is the most accurate analysis.”
Nvidia’s challenge stacks up against Tesla’s stunning new Wood prophecy
Juxtaposing the heroics Nvidia needs to pull off to prove a good investment, and the feats Wood expects from Tesla, make her prediction seem like the ultimate fantasy.
In the Nvidia piece, I stated that in order to provide its shareholders with a relatively modest 10% annual return over the next seven years, Nvidia would most likely need to double its market cap to $6.2 trillion by in 2031. I’ll spare you the details, but I estimated that getting there would require, by the end of that time frame, $200 billion in annual net profits and $580 billion in revenue, for respective annual growth of 25% and 50% . Bottom line: The odds of beating the numbers now posted by the likes of Apple, Microsoft and Alphabet are remote, to say the least. Simply put, investors have raised the bar for what the AI pioneer needs to achieve so high that it will most likely prove a great company and a poor investment.
The Ark report predicts that Tesla will reach an “enterprise value” of $8.2 trillion in five years. Although enterprise value includes debt as well as equity, Ark appears to attribute almost all of this number to the latter. So it’s telling that Tesla’s market cap will jump a third higher than the required but fantastic $6.2 billion valuation for Nvidia in my “roadmap to success,” and it will do so much faster. , in five years instead of seven! Tesla starts the competition with a heavy handicap: It has earned just $13.7 billion in the past four quarters, a third of the $42.6 billion booked by Nvidia.
Arka’s analysis puts Tesla’s earnings through 2031 in the $300 billion range. Getting there would require annual gains of 90% through 2029. That’s almost four times the hurdle for Nvidia. Ark predicts $1.2 trillion in revenue for Tesla at the end of the five-year period; ringing the bell would require annual growth of 65%, a much faster growth rate than the 50% needed to make Nvidia a good buy at these prices.
Simply based on the scale of the numbers measured against what other tech giants have earned and Tesla’s industry size, Arka’s valuations look far more outrageous than the higher numbers baked into Nvidia’s valuation. Revenues of $300 billion in 2029 would be three times what Apple makes today, and $1.2 trillion in revenue would be five times Microsoft’s. Tesla’s sales in 2029 would equal the combined total for the world’s five largest automakers, Volkswagen, Toyota, GM, Ford and BMW. With a market value of $8.2 trillion, Tesla would be worth four times the overall value of the global auto industry.
The goals investors have set for Nvidia and Wood’s bright outlook for Tesla fuel the vision that a single player will dominate a revolutionary industry, facing little competition, virtually forever. For AI colossus Nvidia, that domain is already exploding, what is in doubt is the prospect of dominating forever. For Tesla, the business — robo-taxis that run on its super-profitable software — doesn’t exist yet, and if and when it does, how profitable it will be and whether King Elon can rule it alone are all big questions. .
You have to admire Wood for making a call that seems ridiculous based on anything we’ve ever seen in the financial markets, and Musk for praising the “analysis” behind the gravity-defying target. They may be true believers – but investors need to do the math.