The Best AI Stock to Buy Right Now, According to a Wall Street Analyst (Hint: Not Nvidia or Palantir)

Key Points

• Wedbush analyst Dan Ives says Tesla is the most undervalued AI stock because the market is underestimating its opportunities in autonomous driving and robotics.

• Tesla lost its leadership position in the electric vehicle market to BYD earlier this year, but the company also launched its first autonomous ride-sharing service.

• Tesla is one of the most expensive stocks in the S&P 500, but shares may look cheap in hindsight if the company executes on opportunities related to artificial intelligence.

• These 10 stocks could mint the next wave of millionaires ›

Dan Ives at Wedbush Securities says the market is underestimating how profoundly Tesla (NASDAQ: TSLA) will benefit from autonomous driving technology and robotics. He recently told CNBC, "This continues to be, in my opinion, the most undervalued true AI play." That may surprise readers because Ives also covers Nvidia and Palantir, both of which are cornerstones of the AI trade.

Ives says Tesla will eventually achieve a market capitalization of $3 trillion as physical artificial intelligence products become a material source of revenue. That forecast implies 115% upside from its current market value just shy of $1.4 trillion. But most analysts are less optimistic. Tesla's median target price of $349 per share implies 21% downside from its current share price of $443.

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Is the stock worth buying?

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Tesla lost its leadership position in the electric vehicle market to BYD

Tesla has lost substantial market share across China, Europe, and the United States. The company accounted for 12% of battery electric car sales through June, down from 18% in the same period last year. Meanwhile, Chinese automaker BYD gained 2 points of market share to become the global leader as measured by vehicle volume.

Tesla reported dismal financial results in the second quarter. Deliveries declined 13%, due in part to increased competition, but consumers also shied away from the brand due to CEO Elon Musk's political activities. In turn, revenue declined 12% to $22 billion and non-GAAP net income declined 23% to $0.40 per diluted share.

Evidence suggests the third quarter will be equally disappointing. Sales in Europe declined 40% in July and 37% in August. Sales in China dropped 12% in July and 10% in August. And while sales in the U.S. increased modestly in those months, Tesla's U.S. market share still fell to 38%, the first reading below 40% since October 2017, according to Reuters.

Tesla has big opportunities in physical artificial intelligence (self-driving cars and robots)

Tesla currently earns the vast majority of its revenue from electric cars, but has much larger opportunities in autonomous ride-sharing and robotics. Indeed, Elon Musk thinks Tesla can be the most valuable company in the world several times over -- its market value reaching $30 trillion -- if it executes on opportunities in physical artificial intelligence (AI).

In June, Tesla launched its first autonomous ride-hailing service in Austin, Texas, and the company has since received approval to begin testing in Arizona and Nevada. Alphabet's Waymo is still the market leader, with robotaxi services open to the public in five U.S. cities, but Musk says Tesla has an edge that will allow the company to capture 90%+ market share in the future.

Specifically, Waymo uses a broad sensor suite (lidar, radar, and cameras) to create detailed maps that help its robotaxis navigate. But Tesla relies only on computer vision and does not map cities beforehand, an approach that is both cheaper and more scalable. For instance, despite entering the market three months after Waymo, Tesla robotaxis already have twice the coverage area in Austin.

Meanwhile, Tesla is developing an autonomous humanoid robot called Optimus that Musk says will eventually account for 80% of the company's value. The company plans to scale production next year and hopes to build at least a million units annually within five years. Humanoid robots could radically disrupt the labor market by displacing human workers, especially in tedious or dangerous tasks.

How big are those opportunities? Goldman Sachs expects U.S. ride-sharing revenue to hit $100 billion by 2030, but Morgan Stanley estimates the addressable market is closer to $1 trillion. Similarly, Citigroup analysts expect humanoid robot sales to reach $210 billion by 2035, and Morgan Stanley says that figure will hit $5 trillion by 2050.

Tesla stock is worth owning (for some investors) despite an absurd valuation

Tesla is the third most expensive stock in the S&P 500 at 178 times projected earnings for 2026. That multiple is absurd, but it's also irrelevant to some extent. I say that because the company is shifting focus from electric cars to physical AI, which leaves room for earnings growth to accelerate substantially in the future.

Investors that lack conviction in Tesla's ability to pivot to autonomous ride-sharing and humanoid robots should avoid the stock. But risk tolerant investors (those who can handle a 50% decline) that believe Tesla can disrupt the mobility and labor markets should own the stock. Now is as good a time as any to buy a small position.

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Citigroup is an advertising partner of Motley Fool Money. Trevor Jennewine has positions in Nvidia, Palantir Technologies, and Tesla. The Motley Fool has positions in and recommends Alphabet, Goldman Sachs Group, Nvidia, Palantir Technologies, and Tesla. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.