Conviction investor Cathie Wood is known for her steadfast beliefs. And right behind her devout Christianity comes her unwavering loyalty to Elon Musk.
Even after his company Tesla posted some awful Q4 delivery figures that fell short of even the lowest expectation, Wood swam against the prevailing current by using a double-digit pullback in the stock to buy another 177,000 shares in the electric carmaker worth around $20 million for her exchange-traded funds.
Speaking with Barron’s just before the new year, Wood told the publication the stock could rise to $1,500 in the next five years. In her words, it has “miles to run”.
The CEO of ARK Invest, who also invested in his ailing social media company Twitter, acknowledges Musk’s polarizing online persona has caused reputational damage to the Tesla brand. But customers will return because the carmaker is so profitable he can afford to slash prices just to tempt them back.
Thanks to Tesla’s unbeatable efficiency in everything from manufacturing to procurement, Wood believes it will be able to reduce the entry point on a Model 3 to just $25,000 in the next few years from around $45,000 currently and still earn major profits.
“I think there are people who won’t buy his cars now,” she told Barron’s in an interview published late on Tuesday.
“But if he does what we think he’s going to do on the cost side, there are a lot of people who will use economics as their guide […] and I think there are a lot more of those people than there are of the naysayers around Twitter.”
One of the core reasons it can do that in her estimation is because Tesla will eventually be pocketing 80%-plus margins with its Full Self-Driving (FSD) robotaxi software, currently sold as a $15,000 feature in the U.S. and now in its third year of beta testing.
“Combine that with their electric vehicle margins, which are 25%-30%, and we’ve got a 60%-plus company,” Wood explained. “No one’s got that in their models. We do.”
Consequently, she put her money where her mouth was and scooped up 144,776 shares of Tesla for her flagship ARK Innovation ETF on Tuesday and a further 32,366 for her autonomous technology and robotics-themed ETF. At the time Tesla shares lost as much as 15% in value and plumbed lows not seen since August 2020.
Nothing short of a miracle needed
There’s a reason many investors are hesitant to assign any material value to such an unproven technology like autonomous driving, however.
For one, Tesla effectively crowdsources a portion of its AI training data from its drivers, currently numbering around 285,000 according to the company. While considerable, few if any of these individuals are likely qualified engineers or developers by profession.
Secondly, Musk abandoned the use of radar to complement its cameras starting in May 2021. Most carmakers are taking the opposite route of adding costly sensors like LiDAR lasers that precisely scan their environment and then fuse that with data from cameras, radar and high-definition maps to create an exact picture of where a vehicle is in relation to its surroundings.
Thirdly, regulators are unpredictable and their approach to embracing new technology cannot be accurately forecasted. Europe for example prefers close oversight, which is one reason why despite numerous Musk promises, FSD beta is only offered at present in the U.S. and Canada.
It doesn’t help that the entrepreneur makes excessively ambitious claims he repeatedly fails to meet—such as his April 2019 prediction of one million Tesla robotaxis on the road by the end of 2020—only to laugh them off later with quips like “I don’t want to blow your mind, but I’m not always right.”
By baking her estimate of FSD margins into her valuation model of Tesla and then inferring from that 44% price cuts on Tesla’s core vehicle delivery business, Wood is making a risky bet that would test any investor’s ability for blind faith.
The once-celebrated investor, who rode the 2020 tsunami of fiscal and monetary stimulus to lofty heights, has seen her performance come crashing down as the Fed finally pulled the proverbial punch bowel away last year.
Thanks to bad bets on faddish pandemic stocks like Teladoc, Roku and even Tesla, her Innovation ETF has lost 66% over the past 52 weeks, twice as much as the broader Nasdaq 100.
The bad news doesn’t stop there: her actively managed fund with its $7.5 billion in net assets is even down 22% over the past five years versus a 62% gain in the tech-heavy index.
At this point, she’ll need a miracle just to catch up again with her benchmark.
Musk may not be able to walk on water, but perhaps his FSD software can one day vindicate Wood’s strong convictions.
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