1 Reason Tesla Stock Is Called a "Strong Buy" Before 2026

Shares of Tesla (NASDAQ: TSLA) are roaring to new all-time highs this year, but even more could be in store in 2026. This potential growth has little to do with manufacturing cars. Instead, it involves what could eventually become the biggest growth opportunity in history: artificial intelligence (AI).

Experts think Tesla will become an AI giant

Tesla is traditionally viewed as an electric vehicle (EV) stock. But you'll notice something odd about its valuation. The shares currently trade at nearly 17 times sales. EV competitors like Rivian Automotive and Lucid Group, meanwhile, trade at 3 to 7 times sales. There are two obvious reasons for the sizable valuation gap.

First, Tesla is a proven EV maker with worldwide name recognition and unparalleled access to capital given its $1.4 trillion market cap. This is a big deal in an industry rife with financial failures. Over the past decade alone, at least 30 EV start-ups have gone under.

It's not hard to see why. It can take 10 to 20 years to bring a new vehicle from design to production, especially if the start-up in question has no existing manufacturing infrastructure. To start an EV business with a single model in production takes billions of dollars. But more importantly, it takes a lot of time, requiring these businesses to continually tap financial markets for more funding.

Backing a speculative business for decades with minimal returns isn't something the market usually involves itself in. So while Tesla's large size may imply less growth potential versus its smaller competitors, the company's huge edge in scale and resources cannot be understated.

But not all of its valuation can be explained through these competitive advantages alone. There's one other growth opportunity that could generate more than $1 trillion in value for Tesla in the coming years. It involves AI, but applied in a way that few companies will be able to match.

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The huge opportunity that will power Tesla

Dan Ives, an analyst at Wedbush Securities, recently called Tesla the "the most undervalued AI name." But it's not just any AI company.

Ives considers Tesla a "physical-AI play," giving the stock a strong buy recommendation. Understanding what "physical-AI play" means will give investors great insight into Tesla's lofty valuation and soaring market cap.

For more than a decade, businesses involved in autonomous vehicles have experimented with a wide variety of technologies, including infrared cameras to lidar. Most of these sensors were costly, cumbersome, and flawed when it came to certain navigation challenges.

AI, it turns out, could be the missing link, allowing a fairly limited number of sensors to understand huge data sets being created in real time. Autonomous vehicles, therefore, could finally be on the horizon.

Self-driving cars would be a huge boon for the fledgling robotaxi market. Tesla investor Cathie Wood has speculated that robotaxis could soon be a $10 trillion opportunity. A recent report from her firm, ARK Invest, predicts Tesla will become the biggest winner in this market. Why? Because of two factors: its ability to manufacture its own vehicles combined with its early investments in AI.

A recent ARK Invest report said: "In 2018, [Alphabet's] Waymo began commercial autonomous rides and has expanded gradually during the past seven years. In contrast, Tesla intends to scale quickly with its vision-only, end-to-end AI approach, as it illustrated in just three weeks by extending coverage in Austin [Texas] beyond that of Waymo." Note, however, that Waymo arguably has achieved much more success in terms of autonomous rides without direct human supervision. Additionally, ARK Invest is heavily invested in Tesla stock, so a bullish take should be expected.

This quarter, we received few tangible updates from Tesla's new robotaxi division. Elon Musk predicts it will expand to perhaps 10 new cities by year end, but I've detailed how his bullish predictions typically fail to become reality. Still, any additional expansion could set up next quarter's conference call -- to be held in early 2026 -- as a blockbuster opportunity to show huge growth in this promising division.

Tesla shares are incredibly expensive when looking at its existing business model. But next year, the company expects to become a fully fledged AI operator of robotaxis, potentially more than justifying its current valuation.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Tesla. The Motley Fool has a disclosure policy.