Fund Manager David Baron Predicts Parabolic Rally for Tesla Despite Slowing Growth
Tesla Inc., the electric-vehicle maker led by Elon Musk, has experienced a slowdown in growth and a decline in profit, making it the weakest stock on the Nasdaq 100 this year. However, fund manager David Baron remains optimistic, predicting that this is just a temporary setback before another parabolic rally.
Despite Tesla’s recent warning about expanding at a slower pace this year, which caused a 12% drop in the stock price, Baron believes in Musk’s ability to navigate through these challenging times. As of December 31, Tesla and Musk’s privately held SpaceX were the largest holdings in Baron’s fund, the Baron Focused Growth Fund. Last year, the fund outperformed its benchmark, the Russell 2500 Growth Index, and the S&P 500, with a 28% increase in value.
Baron expects Tesla’s stock to reach $1,200 by 2030, representing a 550% increase from current levels. He attributes this optimism to Tesla’s strong brand. Despite the projected slower sales growth for this year due to the overall decline in the electric vehicle industry, Baron still anticipates the stock to reach around $300 within the next 12 months.
Baron highlights that even though Tesla may not achieve the previously expected 50% annual growth rate, it is still growing volume by 15% to 20% per year and generating a gross profit of $7,000 per car. In 2023, Tesla delivered 1.8 million cars, a 38% increase from the previous year. Wall Street analysts predict a 17% increase in unit sales for this year.
The success of Tesla is crucial for Baron’s goal of increasing his fund’s assets to $2 billion this year. His father, Ron Baron, a well-known Wall Street veteran, is also a strong believer in Musk and oversees the Baron Partners Fund, which has consistently outperformed the Nasdaq 100 over the past five, ten, and fifteen years.
In addition to Tesla, Baron is optimistic about SpaceX, predicting a 20% increase in valuation within a year, a doubling within three years, and a tripling within five years. Last month, Bloomberg reported that SpaceX is worth $175 billion or more.
David Baron became co-portfolio manager of the fund in 2018, alongside his father. The fund initially purchased Tesla shares in 2014. Its success last year was driven by Tesla’s potential in artificial intelligence.
However, replicating this success in 2024 may be challenging if Tesla struggles amid declining demand for electric vehicles. Some investors are starting to question the company’s growth narrative. Analyst Toni Sacconaghi from Sanford C. Bernstein noted that while Tesla bulls argue that the company’s innovation can sustain a cost advantage and strong margins, the counterargument is that the automotive industry is highly competitive, and carmakers have historically struggled to maintain cost advantages.
Baron’s investment strategy aligns with his father’s approach, focusing on companies where leaders have significant stakes in the business and have the potential to double in market value within five to six years, reflecting a compounded growth rate of 15% per year.
Apart from Tesla and SpaceX, Baron is also banking on other holdings such as CoStar Group Inc., which he expects to have a 20% upside as its residential investments generate returns. He also anticipates strong cash flows from companies like Arch Capital Group Ltd., Figs Inc., and Choice Hotels International Inc.
Ultimately, Musk and his companies remain crucial to Baron’s portfolio. Baron believes that Musk’s interests are aligned with shareholders and that he will not make any detrimental decisions that would alter the trajectory of the companies.
In conclusion, despite Tesla’s recent challenges, fund manager David Baron remains confident in the company’s long-term prospects. He believes that Tesla’s strong brand, along with Musk’s leadership, will drive the stock price to new heights in the coming years. While there are concerns about the competitive nature of the automotive industry and waning demand for electric vehicles, Baron’s investment strategy focuses on companies with significant growth potential and leaders who have a vested interest in their success. With his father’s successful track record and the overall positive outlook for the electric vehicle industry, Baron’s predictions may hold true, and Tesla could experience another parabolic rally in the future.
