On June 13, I published a story highlighting that Nvidia’s massive market cap increase to $3.1 trillion makes it virtually impossible for the company to sustain the rapid growth in sales and profits necessary to reward shareholders. On the same day, Cathie Wood, CEO of Ark Invest, appeared on CNBC to promote her firm’s extraordinarily bold projections for Tesla’s stock price. Wood predicted that Tesla’s shares would reach $2,600 by 2029, nearly fifteen times their current level of $175. This projection was supported by a detailed report from three Ark analysts, outlining the financial metrics they expect Tesla to achieve in five years. Tesla CEO Elon Musk expressed strong approval of the report, tweeting, “I think it’s worth looking at Ark’s analysis, I think that’s the most accurate analysis.”
Comparing Nvidia’s Challenges to Wood’s Tesla Forecast
Comparing the heroics Nvidia must achieve to justify its valuation with Wood’s ambitious forecast for Tesla reveals that her predictions for Tesla appear even more fantastical. In my Nvidia analysis, I estimated that to provide shareholders with a modest 10% annual return over the next seven years, Nvidia would need to double its market cap to $6.2 trillion by 2031. Achieving this would require annual net earnings of $200 billion and revenues of $580 billion by the end of that period, translating to annual increases of 25% and 50%, respectively. This level of growth, surpassing the achievements of tech giants like Apple, Microsoft, and Alphabet, seems highly improbable. In essence, while Nvidia is likely to remain a great company, the expectations placed on it may render it a poor investment.
Ark’s Tesla Forecast
The Ark report predicts that Tesla will reach an “enterprise value” of $8.2 trillion in five years. Although enterprise value includes both debt and equity, Ark’s projection seems to attribute almost all of this value to equity, implying a market cap far surpassing Nvidia’s required $6.2 trillion target. Tesla would need to accomplish this in five years instead of seven. Starting from a current earnings base of $13.7 billion—about one-third of Nvidia’s $42.6 billion—Tesla faces a daunting challenge.
Ark’s analysis suggests that Tesla’s profits could reach around $300 billion by 2031, necessitating annual gains of 90% through 2029. This is nearly four times the growth rate needed for Nvidia. Ark also projects Tesla’s revenues will hit $1.2 trillion by the end of the five-year period, requiring annual increases of 65%, which is significantly faster than Nvidia’s required 50% growth rate.
Comparing the Projections
Based purely on the scale of the projected numbers and the current benchmarks set by other tech giants, Ark’s estimates for Tesla appear far more outrageous than Nvidia’s targets. The $300 billion in profits by 2029 would be three times what Apple earns today, and the $1.2 trillion in revenues would be five times Microsoft’s current earnings. Tesla’s 2029 sales would match the combined total of the world’s five largest automakers: Volkswagen, Toyota, GM, Ford, and BMW. With a market cap of $8.2 trillion, Tesla would be worth four times the entire global auto industry.
Vision of Industry Dominance
The expectations set for Nvidia and Wood’s grandiose forecast for Tesla hinge on the belief that a single company will dominate a revolutionary industry with little competition indefinitely. For Nvidia, the AI sector is already burgeoning, but sustaining dominance is uncertain. For Tesla, the envisioned business of robo-taxis powered by lucrative software is not yet realized, and its future profitability, arrival, and Tesla’s ability to dominate it alone are all significant uncertainties.
The Feasibility of Such Growth
To further underscore the improbability of these projections, let’s consider the broader market and historical context. For instance, Apple, a company heralded for its innovation and market dominance, took decades to reach its current level of financial performance and market cap. The kind of exponential growth projected for both Nvidia and Tesla would not only require unprecedented advancements in technology and market adoption but also a favorable regulatory environment, sustained consumer demand, and the ability to fend off emerging competitors.
The Market’s Reaction
Investors should also consider how the market might react to such aggressive growth targets. High expectations can often lead to volatile stock prices, as any deviation from projected growth can result in significant market corrections. For instance, if Nvidia or Tesla were to miss earnings targets or encounter unexpected challenges, the market could react swiftly and harshly, impacting shareholder value.
The Role of Market Sentiment
Market sentiment plays a crucial role in stock valuations. The enthusiasm surrounding AI and electric vehicles has undoubtedly contributed to the high valuations of Nvidia and Tesla. However, sentiment can change rapidly. Economic downturns, geopolitical tensions, or shifts in consumer preferences can all impact investor confidence and, consequently, stock prices. Investors should remain cautious and consider these factors when evaluating the long-term potential of such high-flying stocks.
The Impact of Competition
Both Nvidia and Tesla operate in highly competitive industries. For Nvidia, competition from other tech giants in the AI space could pose significant challenges. Similarly, Tesla faces competition from both established automakers and new entrants in the electric vehicle market. The ability of these companies to maintain a competitive edge through innovation, efficiency, and customer loyalty will be critical to achieving their ambitious growth targets.
Regulatory Considerations
Regulatory developments can also impact the growth prospects of both Nvidia and Tesla. For instance, AI technologies are increasingly coming under scrutiny for ethical and privacy concerns, which could lead to stricter regulations. Similarly, the automotive industry is subject to stringent environmental and safety regulations, which could impact Tesla’s growth trajectory. Investors should keep an eye on regulatory trends and potential changes that could affect these industries.
Final Thoughts
While the growth projections for Nvidia and Tesla are undoubtedly ambitious, they are not without significant risks and challenges. Investors should carefully consider the feasibility of these targets, the competitive landscape, market sentiment, and regulatory environment before making investment decisions. Both companies have the potential to be great investments, but it is essential to approach these projections with a critical eye and a realistic understanding of the market dynamics at play.