Ron Baron is a billionaire mutual fund investor and the founder of wealth management firm Baron Capital. Back in November, Baron sat down for an interview with CNBC's morning program, Squawk Box, and proclaimed that he sees Tesla (TSLA -4.61%) reaching a $5 trillion valuation within the next decade.
Well, earlier this month Baron joined Squawk Box again and he appears to be doubling down on his high conviction in Tesla.
As of market close on March 21, Tesla sported a market capitalization of $800 billion. Can Tesla's valuation really rise more than 500% over the next 10 years as Baron suggests?
Let's find out what's behind Baron's bull thesis and assess if Tesla can realistically become a $5 trillion business.
Autonomous driving is the key
Believe it or not, artificial intelligence (AI) has a lot of use cases in the car industry. One of the more notable ambitions that car manufacturers are increasingly exploring is autonomous driving -- or the ability for a vehicle to drive itself without human intervention.
Tesla CEO Elon Musk has been vocal about his ambitions to integrate self-driving software into the company's vehicles for years. Right now, Tesla owners can choose to subscribe to the company's autonomous driving software -- dubbed Full Self-Driving (FSD) -- in certain geographic regions.
However, the more lucrative opportunity for Tesla revolves around the company's robotaxi initiative.
Essentially, the robotaxi program is planned to be a widespread fleet of Tesla vehicles on the road that consumers can use. In the section below, I'll break down why robotaxis could be the tailwind that propels Tesla's valuation well into the trillions.
Image source: Tesla.
Looking at the math behind Tesla's self-driving ambitions
The video below is from Baron's recent segment on CNBC. When you first listen to his assumptions, it almost seems too good to be true. After all, why is the robotaxi business expected to carry such high profit margins?
Ron Baron about Tesla $tsla: "If you do 50,000 miles a year for a car (Robotaxi) those cars generate ... 30, or 40 or 50,000 Dollars in profits per year. Per car.
-- Alex (@alex_avoigt) March 13, 2025
So every time you have a million cars you adding 30, or 40 or 50 Billion Dollar to profits per year." pic.twitter.com/5sTbakQKsi
The idea here is that FSD is a software product that's available for a subscription. Subscription services tend to boast high gross margins given the their recurring revenue streams.
If we expand upon FSD and imagine a scenario in which Tesla has fleets of robotaxis around the world, the underlying theory is that people may choose to use one of these vehicles to hail a ride or even rent them while traveling.
In essence, Tesla is trying to parlay the recurring nature of an FSD subscription to a commercially available fleet of its cars that are conveniently available for a multitude of services. If the company pulls this off, robotaxis could become an enormously sticky business for Tesla and unlock billions of new cash flow for the business -- hence, investors could begin to assign Tesla a premium valuation multiple that's more commonly seen in high-growth software businesses.
The path to $5 trillion is there, but it won't be easy
When I was younger, I spent several years working as a financial analyst at an investment bank. I bring this up because I've built and tweaked a lot of financial models, budgets, and forecasts in my time.
One thing that I can say about financial modeling is that it is a highly sensitive exercise. Forecasts can change drastically depending on the set of assumptions you're using.
While I fully comprehend the potential of the robotaxi initiative, I'm also asking myself the following questions:
- How competitive will robotaxi be with Waymo and others at scale?
- Will Tesla partner with ride-hailing services such as Uber or Lyft, or try to compete with them directly once fleets of robotaxis are on the road?
- What does the regulatory landscape for robotaxis look like?
I bring these points up because it's very easy for investors to become enamored by the potential of an exciting idea. But to me, the answers to the questions outlined above aren't entirely clear right now.
How can you integrate those parameters into a forecast? The real answer is that you can't really do that without making even more assumptions, thereby making a future price prediction even more susceptible to different variables and outcomes.
At the end of the day, I do think the robotaxi initiative will become a highly successful endeavor for Tesla. But for now, I wouldn't invest in Tesla stock expecting its value to rise sixfold over the next several years.
Instead, I think if you are a growth-oriented investor who can stomach volatility and wants exposure to the AI industry, then buying the current dip in Tesla stock with the idea of holding your shares for many years could be a reasonable choice right now.
