- ARK Invest believes Tesla can capture 17% market share in the automobile industry.
- Tesla’s balance sheet suggests it doesn’t have enough cash to even maintain its current market share.
- ARK has been dumping Tesla shares, so investors shouldn’t completely trust their forecast.
Tesla stock has been flying high over the past few months. The stock quickly recovered from the CyberTruck launch fiasco and is back trading near 2019 highs.
With the stock’s recent rise, the expectations of Tesla bulls seem to have inflated as well. Cathy Wood, the founder and CEO of ARK Invest, who’s also probably the biggest Tesla cheerleader out there, made an outlandish projection about the company this Monday.
On CNBC’s Squawk Box segment, Cathy claimed that Tesla can capture 17% market share of the entire automobile industry when it completely transitions to electric vehicles. Cathy also asserted that the EV-maker will consistently maintain its current 17% market share even as the entire industry pivots to electric.
Cathy’s bear case for Tesla values the company at roughly $700 whereas her bull case gives the stock an insane valuation of $4,000. Given her optimism, she likely believes her claim about Tesla’s market share. However, in reality, Tesla will likely never get anywhere close to the 17% mark for multiple reasons.
Tesla doesn’t have the Resources
Legacy car manufacturers have been in business many decades and none of them have ever gotten anywhere close to the 17% mark. In fact the biggest two—Volkswagen and Toyota—don’t even have 17% market share combined.
To put the ridiculousness of the forecast into perspective, Toyota and Volkswagen sold a total of roughly 20.4 million cars in 2018. By comparison, if Tesla hits the bottom-end of its guidance range it will sell just 360,000 cars in 2019.
To make matters worse, sales of Tesla’s high margin cars, the Model S and the Model X have been declining. Earlier this year, Elon Musk even said the company is only making both the models ‘for sentimental reasons’.
The Model 3 and the upcoming Model Y will more than make up for the lost volumes of the Model S and X. However, replacing high-margin cars with low-margin cars won’t prove to be a winning strategy in the long run, especially for a loss-making, highly-leveraged company like Tesla.
Tesla will need many new ‘Gigafactories’ to scale up to tens of millions of annual unit production. But the company just doesn’t have enough money to do it. In fact, if you take into consideration the production and testing costs of the Model Y and the CyberTruck, the company doesn’t even have the money to make the Berlin Gigafactory it announced last month.
Tesla only has $5.3 billion in cash on its books and the Gigafactory Berlin alone is expected to cost upwards of $4.5 billion.
And to make matters worse, over 60 new competitors are expected to enter the EV market in the next two years. Most of the traditional automakers have a much bigger war chest than Tesla. So it will be impossible for Tesla to out-manufacture and out-sell them.
With no sustainable profitability in sight, the Silicon Valley car maker will face severe difficulties in just maintaining its current market share, let alone growing it.
ARK Invest has been Unloading Shares
ARK Invest dumped a big chuck of its Tesla holdings just days before the company posted the third quarter results and missed the entire rally to $360.
For a firm that believes Tesla is going to hit $700 in the worst case scenario, dumping $39 million in stock for less than $270 doesn’t really make sense. So maybe Cathy doesn’t completely believe in her thesis and investors should take her forecasts with a pinch of salt.
Last modified: September 23, 2020 1:23 PM