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Tesla (NASDAQ:TSLA) stock rose 4% yesterday (27 October) to break back above $400. Yet the Tesla share price is down 11% over the past year. When taking a look through the forecasts from banks and brokers, there are some that are anticipating a large rally. Let’s dive in.
Shooting for the stars
Based on the 71 contributing analysts I can see, Wedbush has a target price of $600 for Tesla. For perspective, the share price is currently $407.46. If it hits it, that would be a 47% increase in the coming year.
The average target price is $419.72. So this gives me a much clearer view of how the experts see things panning out. In fact, if the average price turns out to be correct, my chances of making a lot of money by buying Tesla shares now are small.
Of course, with any forecasts, it’s important to take them with a pinch of salt. Even though the people doing the research are smart, their target price is still subjective. There’s no guarantee that Tesla stock will reach this level.
Why Tesla could hit $600
I think the biggest opportunity comes from Tesla’s transition beyond electric vehicles. This might seem odd, but hear me out. Its autonomous driving technology, particularly its Robotaxi service, could fundamentally change how investors value the business.
Unlike traditional car manufacturing, autonomous ride-hailing could eventually generate recurring revenue with attractive margins. I’m all about companies that have sticky recurring revenue as it’s reliable. Tesla has already expanded its Robotaxi operations, with unsupervised miles increasing eightfold during the third quarter. Further expansion into major US cities could really help the Tesla share price increase.
Another encouraging development is the growing adoption of Full Self-Driving (FSD) software. Subscriptions increased 67% to 1.74m during the latest quarter. I think this is particularly important because software revenue offers the potential for significantly better margins than vehicle manufacturing.
The other angle that could take off is Optimus, Tesla’s humanoid robot. Although meaningful commercial revenue remains some distance away, progress towards external deliveries could spark a rally in the stock.
Why I’m not convinced
That $600 target does seem a bit of a stretch to me, even with the catalysts mentioned above. In my eyes, the financial performance isn’t entirely convincing. Third-quarter revenue was broadly flat at $28bn, while operating profit fell approximately 56% to $718m. Heavy investment in AI and robotics is weighing on profitability, and investors aren’t too happy about that.
Valuation is another concern. The market cap is currently $1.5trn. At $600, this would bump it significantly higher, to a level I’m not sure would be justified. Put another way, such a high valuation would require investors to price in considerable future success before it materialises.
Then there are other worries, which range from competition from Chinese electric vehicle manufacturers right through to regulatory obstacles surrounding autonomous driving.
Put all together, I don’t think $600 is a realistic target for the Tesla share price, and I think there are better options out there for investors to consider right now.
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Jon Smith has no positions in the shares mentioned.
This story originally appeared on Motley Fool
