Tesla’s shares have halved, they could just be the bargain of the century

Tesla shares are currently $427. If recent comments from an analyst are right, they could increase 30-fold by 2024.

Article updated: 23 March 2020 11:00am Author: Michael Baxter

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To understand why we need to start with Theodore Paul Wright. He was an American aeronautical engineer who died back in 1970. In the 1930s, to quote Ramez Naam, an expert on the disruptive compact of renewables he “observed that every doubling of production of US aircraft brought down prices by 13%."

From that we get Wright’s Law. There are many similar concepts. I would argue that Moore’s Law is very similar, because its path is correlated with the scale of the total computer user base.

And Wright’s Law is what makes Tesla exciting. Poor understanding of its implications explain why many analysts still don’t get it.

Wright’s Law

In a recent interview with ZDNet, Tasha Keeney, an analyst at Ark Invest said: “Wright's Law has forecast cost declines successfully in more than 60 technologies ranging from solar power to televisions, and from semiconductors to ovens. Tesla's Model 3 already has demonstrated cost declines in line with Wright's Law.

Keeney projects that as Tesla costs fall commensurate with Wright’s Law, the company will enjoy a 40 per cent margin by 2024.

She also projects that Tesla shares are most likely to reach $7,000 by 2024, worse case $1,500 and best case (bull case) $15,000. So, even her worse case, would see a three-fold rise in the share price.

If the bullish case is realised, Tesla’s market cap would reach $3.7 billion in 2024, more than three times Apple’s market cap before the Covid-19 crash, and almost twice the value of Aramco a few weeks ago, when it was the most valuable company of all time.

It's easy to think of reasons, why not? Tesla recently passed its one millionth car. Yet Keeney is basing her projection on the assumption total sales of electric vehicles will hit 37 million in 2024.

I can think of two reasons to support this extraordinary projection and one reason to be cautious. Bear in mind, there are no guarantees. An investment in Tesla is high risk.

Tipping points lead to super fast change

The first pro-case is one about tipping points. Ask yourself this question. Would you buy an internal combustion engine car (ICE) if an electric vehicle (EV) offers a superior performance for less money?

At the moment, there are plenty of downsides to buying an EV. There is the issue of charging it up, the travelling distance between charges and the significant upfront costs. 

Consider how the economics of an EV have been transformed in recent years. There are more charging points, it takes less time to charge-up and the mileage between charges is much greater.

EVs have less moving parts than ICE cars, meaning the cost of maintaining an EV is much less. Battery related issues aside, they should last longer than ICE cars, too. Tesla has filed for a patent for a lithium ion battery that is expected to last for one million miles. The potential lifetime of an EV will soon be much longer than for a traditional car.

The falling cost of lithium ion batteries, taking into account the cost of electricity in charging them up, means that the current lifetime cost of an EV is close to parity with an ICE. However if the trajectory of the last 12 years continues, then by 2032, a lithium ion battery, by far the most expensive component in an EV, could be ten per cent of the current cost.

At some point between now and 2032, EVs will be so superior to ICE cars that it will be hard to imagine anyone opting for the more traditional type of car. The switch from ICE to EV won’t be gradual — it will be super fast.

I am not so sure this rapid transformation will occur as soon as 2024, but if it doesn’t, it will within a couple of years.

Ride hailing

The bullish projections from Keeney also assume the emergence of ride hailing autonomous cars. In this scenario it is assumed Tesla becomes a major competitor with Lyft and Uber.

I would say that the ride hailing autonomous car market will most certainly emerge. It will transform the car industry. Tesla is superbly placed, and indeed is better prepared for this opportunity than any other car manufacturer in the world. I just think 2024 is a little optimistic— 2028-2030 is more likely.

The opportunity is enormous. Ark reckons Tesla has a three year lead over competitors — I don’t find that hard to believe. Tesla is more than capable of keeping that lead for years.

And as we move towards autonomous cars, expertise in AI will be more important than any other speciality. Tesla is one of the leading AI companies in the world

What could go wrong?

The biggest risk to all this is that Tesla might run out of money and thanks to Covid-19, this risk has grown.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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