Gene Munster believes Tesla is on pace to be a $3 trillion company.
Gene Munster, co-founder and managing partner at Deepwater Asset Management, recently told CNBC that Tesla (TSLA -0.89%) is on pace to be a $3 trillion company. Munster highlighted opportunities related to artificial intelligence (AI), like full self-driving software and robotaxi services as key growth drivers.
His prediction lacks a specific timeline, but a $3 trillion valuation implies a 335% upside from Tesla's current market capitalization of $687 billion.Here's what investors should know.
Tesla continued to struggle with waning demand in the second quarter
Tesla reported disappointing financial results in the second quarter. Revenue increased a meager 2% to $25.5 billion, narrowly topping expectations. But GAAP net income nosedived 45% to $1.5 billion, missing estimates for the fourth consecutive time. The company has now recorded a profit margin below 6% in back-to-back quarters, something that hasn't happened in more than three years.
On the bright side, demand for electric vehicles (EVs) should improve as the macroeconomic climate becomes more favorable for consumers. The catalyst for that turnaround could come later this year. Pricing data from futures contracts implies three 25 basis-point rate cuts in 2024. Specifically, investors believe the Federal Reserve will lower its benchmark interest rate at meetings in September, November, and December.
Additionally, while Tesla has lost share in battery electric vehicles (BEVs) this year, the company remains a formidable player. In the U.S., Tesla accounted for 48% of BEV sales through May, topping the next closest competitor by 40 percentage points. Globally, Tesla accounted for 16% of BEV sales through May, trailing the industry leader BYD by less than 1 percentage point.
Tesla may be an artificial intelligence company disguised as an automaker
The bull case for Tesla says its core electric-vehicle business is a stepping stone to bigger opportunities in software and services, especially those related to artificial intelligence. Full self-driving (FSD) software is the cornerstone of that narrative. In theory, FSD will support direct monetization via subscription and licensing, and indirect monetization via autonomous ride-hailing (robotaxi) services.
In 2023, CEO Elon Musk told CNBC's David Faber that robotaxis could push Tesla's gross margin toward 70%. That would be a dramatic increase in profitability, compared to its gross margin of 18% in the most recent quarter. Adam Jonas at Morgan Stanley believes Tesla could be a "formidable player (if not an outright winner) in the race to autonomy," due to its strong presence in the electric-vehicle market, which itself has given rise to a material data advantage.
Tesla uses its vast network of FSD-enabled vehicles to source video data, and that data is used to train and improve the underlying machine-learning models. Tesla has data from over 1.3 billion miles driven in FSD, and Ark Invest estimates the company is accumulating data 110 times more quickly than Alphabet subsidiary Waymo, its primary competitor.
Gene Munster believes FSD could generate $100 billion in annual operating income through subscription and licensing fees within a decade. Tesla doesn't currently license its FSD software, but Musk, on the recent earnings, call told analysts: "There are a few major OEMs that have expressed interest in licensing Tesla full self-driving, and I suspect there will be more over time. But we can't comment on the details of those discussions."
The Dojo supercomputer is another potential revenue stream related to artificial intelligence. Dojo features custom chips purpose-built for video training that should accelerate FSD development. Taiwan Semiconductor recently confirmed those custom chips are in production, and Musk believes Dojo could be competitive with Nvidia-based systems in the future. With proof of concept, Tesla could monetize Dojo by selling AI cloud services to other businesses.
More importantly, Dojo is tailormade for AI vision systems, so it should help the company more quickly train the machine-learning models that power its FSD software. Adam Jonas at Morgan Stanley discussed that idea in a note to clients: "In its quest to solve for autonomy, Tesla has developed an advanced supercomputing architecture that pushes new boundaries in custom silicon and may put Tesla at an asymmetric advantage in a $10 trillion total addressable market."
Tesla plans to unveil its robotaxi at a company event scheduled for Oct. 10. On the earnings call, Musk fielded a question about when Tesla expects the first robotaxi ride. He said: "Possibly by the end of this year. I would be shocked if we cannot do it next year."
Tesla could be a $3 trillion company by 2034
Wall Street expects Tesla to grow revenue and earnings per share at annual rates of 16% and 25%, respectively, through 2026. Those estimates seem too pessimistic, perhaps due to macroeconomic uncertainty and skepticism about Tesla's ability to pivot toward software and services.
I think Tesla could grow earnings by 30% annually over the next decade. I say that because electric-vehicle sales are projected to increase at 33% annually through 2030, and the robotaxi market is forecast to expand at 53% annually through 2032.
If Tesla does grow earnings at 30% annually over the next decade, the stock could certainly appreciate by 16% annually over the same period, carrying its market capitalization to $3 trillion by mid-2034.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Tesla. The Motley Fool has positions in and recommends Alphabet, BYD Company, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.
