One Wall Street analyst is exceptionally bullish on Tesla.
Due to rapid advancements in artificial intelligence (AI) and machine learning, many experts believe that the age of autonomous driving is finally upon us. Cathie Wood, the chief executive officer of Ark Invest, for example, believes the global robotaxi market could eventually be worth $10 trillion.
Tesla (TSLA 3.54%) is arguably leading the robotaxi charge after years of investment and lofty promises from its CEO, Elon Musk. The company launched a pilot version of its robotaxi service earlier this year in Austin, Texas. In August, Tesla expanded service to parts of San Francisco, with an eye on expanding the service to even more cities during the coming months and years.
How big could the robotaxi opportunity be for Tesla? One prominent analyst thinks this division alone could add nearly $1 trillion to Tesla’s market cap by the end of 2026. That suggests about 75% in potential upside over the next 15 months. His prediction has a sound rationale, but investors should be aware of a few risk factors before jumping in.
This analyst thinks Tesla’s robotaxi division will be huge
Dan Ives, a high-profile analyst at Wedbush Securities, is a big fan of Tesla’s robotaxi ambitions. Ives tested the service personally when it launched in Texas. He came away very impressed. “Going into it, we expected to be impressed,” he wrote to clients after his experience. “But walking away from it, all there is to say is that this is the future.”
It’s important to note that Ives didn’t necessarily experience true autonomous driving during his demonstration. That’s because Tesla is still using remote operators to monitor and, when necessary, manually take control of its taxis. Still, even a semi-autonomous experience is an achievement to witness. “The ride itself was completely smooth,” Ives added, “and it was indistinguishable that the car was driverless as there was never a moment in the vehicle where we felt as if it did something irrational.”
Ives currently has a $500 price target on Tesla shares, implying a 20% gain, but believes the robotaxi opportunity will help Tesla reach a $2 trillion market cap by the end of 2026. The launch, Ives believes, marks the “beginning” of Tesla’s journey as an AI company.
Image source: Getty Images.
Three reasons to avoid Tesla stock despite the robotaxi opportunity
There are plenty of reasons to be excited about Tesla’s robotaxi opportunity. The total addressable market is very large, and Tesla’s early investment and existing scale give it a leading position to take the market by storm. But is it really likely that the shares rise 75% during the next 15 months due to this opportunity as analyst Dan Ives believes? There are three reasons to be cautious.
First, Ives has been historically optimistic. Often, he has announced drastic cuts to his price targets after a company fails to meet his expectations. In April, for instance, he slashed his price target on Tesla from $515 per share to just $315 per share, only to raise the target once again to $500 per share a few months later.
Second, Tesla is likely far from achieving a fully autonomous robotaxi service. Musk has predicted there will be millions of Tesla robotaxis roaming the streets by the end of 2026, but remember that he has also promised fully self-driving cars for nearly a decade — a feat the company has still not achieved. Until we have hard proof that Tesla has scaled a truly autonomous service in a major U.S. city, investors should remain wary of promises like these.
Finally, Tesla shares are arguably already priced for perfection. Shares trade at 15 times sales — far higher than other electric-vehicle makers like Lucid Group or Rivian Automotive — even though sales are expected to drop this fiscal year. The robotaxi opportunity does add more growth potential to Tesla’s core business. But this should be viewed as a long-term opportunity, not something that will see full realization over the next 15 months.
In many ways, Tesla has become a meme stock, making its price action unpredictable. But I’m remaining skeptical that the company’s robotaxi division will scale fast enough to provide 75% upside during the next year and a half.
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.