Tesla Stock Makes Up Nearly 8% of Cathie Wood's Portfolio, and AI Is a Big Reason for That. Is It a Buy?

Ark Invest, the investment company led by Cathie Wood, has become known for taking risks on fast-growing companies. Despite short-term market fluctuations, Wood prioritizes the long-term potential of stocks when selecting companies to invest in for her ETFs.

Everyone knows that she has a lot of confidence in Tesla (TSLA -1.19%). Presently, the stock accounts for 7.9% of Ark's entire holdings, making it the biggest investment. This also involves a 10.8% importance in the Ark Innovation ETF.

Ark recently conducted a study that was released in April. The study predicts that Tesla's stock will reach $2,000 per share by 2027 based on analyzing the potential consequences of revenue, profitability, and predicted stock value. However, even if the worst case scenario were to occur, Ark still believes that the stock would be valued at $1,400.

The basis for these ideas comes from Tesla's dominant position in the field of artificial intelligence (AI) as well as their data collection methods that are used to improve their self-driving technology beyond the skills of human drivers. As a consequence, Ark Investment Management anticipates that the bulk of Tesla's earnings will derive from their robotaxi venture by the year 2027.

Tesla's stock has increased tremendously this year, but it still has a long way to go to reach its highest value of $414 per share. If Cathie Wood's anticipated price of $2,000 for the stock becomes a reality, investors could potentially make eight times their investment based on the current trading price of $252. It is important to examine the company's growth projections to understand how realistic this goal may be.

Tesla's Optimistic Outlook For Robotaxi Launch

The potential worth of Ark relies heavily on Tesla's success with robotaxis. During the Q1 2022 earnings call, CEO Elon Musk stated that Tesla aims to achieve mass production of robotaxis by 2024. Taking this into account, Ark predicts that Tesla will likely begin offering robotaxi services for sale to the public by 2024 or 2025.

According to Ark's analysis, it is not very likely for Tesla to release its robotaxis for public use in 2023, as there is only a 22% chance of that happening. However, there is a higher chance of 33% that Tesla will launch their robotaxi technology in 2024 and a 30% probability for the year 2025.

As per Ark's evaluation, Tesla has the potential to produce revenue amounting to more than $1 trillion within the next seven years. The majority of this revenue, approximately 44%, is projected to be from robotaxis while 47% will come from electric vehicle sales (EVs). A smaller percentage is expected to originate from energy-related solutions such as solar panels, ride-hailing services driven by humans, and insurance.

Wood might be accurate about the future expansion of Tesla, but it's possible that the timing may not align appropriately. Musk's aim for 2024 appeared impractical since it only allowed for two years to assess and secure the requisite regulatory permissions. Although two robotaxi firms recently obtained approval in California, momentum is growing, but there are still safety apprehensions that necessitate resolution.

Additionally, Tesla has yet to accumulate adequate information to surpass human drivers with its autopilot technology. Although it is advancing quickly, its Dojo training computer has not reached that level yet. During the earnings call for the second quarter, Musk acknowledged, "I have been overly optimistic in the past with my projections of attaining complete self-driving capabilities."

I wouldn't purchase the stock with the hopes of Tesla releasing robotaxis in a short period of time and skyrocketing its stock prices. However, I am convinced that investors don't necessarily need to make such calculated predictions for the company's future ventures to make a wise investment decision at present.

The Texas Tesla Gigafactory can be seen in the image provided by Tesla.

Why Tesla Is A Valuable Investment

Before, Musk expressed great excitement about robotaxis. The demand for autonomous cab services is projected to increase by approximately 91.8% each year from the year 2023 up to 2030, as per MarketsandMarkets. It's bound to be an enormous market, and Tesla is already well-positioned to take advantage of it.

Tesla's advantage lies in the fact that there are a greater number of its cars on the road, which are collecting data to enhance its Dojo training computer beyond the competence of a human driver. In other words, the software capabilities are a significant reason why Wood thinks that the value of the company's stocks may be underestimated at the moment.

According to Wood, Tesla's potential for growth does not solely rely on the increase of sales in electric vehicles. Instead, its prime opportunity lies in the expansion of their autonomous driving software. She believes that Tesla has the potential to transform into a software-as-a-service artificial intelligence platform.

You don't necessarily need to trust what Wood says. The information actually came from the CEO himself. During the latest meeting held to discuss earnings, Musk stated that Tesla is more than willing to provide other car companies with access to their complete self-driving (FSD) software and hardware. He also mentioned that they are currently in talks with one of the leading manufacturers regarding the use of the software.

Tesla has previously shown that they can improve their profit margin through enhancements to their electric vehicle production. As soon as they receive approval for their autonomous taxis and they're ready to hit the roads, Tesla will have even more capacity and resources to launch them swiftly. If Tesla decides to license their software, this will generate additional earnings that will contribute to their already-healthy profit margins.

It appears that Tesla could only be prevented from progressing by issues with development timelines or regulations. However, investors may still achieve a performance on the stock that surpasses the market, even in such circumstances. Although the stock has a high price-to-sales ratio of 9.3, this is typical for a business that acts as an industry leader while still having significant potential for expansion within their current ventures and future endeavors.

When thinking about Tesla's current strengths like its strong brand recognition and future potential in technology such as software and robotaxis, it may be a smart decision to keep a small amount of Tesla's stock in a diversified investment portfolio due to its potential for future growth.

John Ballard holds stakes in Tesla. The Motley Fool endorses Tesla and also has an investment in it. The Motley Fool has a policy of disclosing such affiliations.