Tesla Is Suffering Dojo Brain Drain. Why the Stock Went Up.

Investors see Tesla as more than a car company. So, what would shutting down an AI computing unit mean for the stock? (Photo by Justin Sullivan/Getty Images)

Tesla stock rose Friday, brushing off AI brain drain at Elon Musk’s electric vehicle maker.

Shares of the electric-vehicle maker were lower in premarket trading, but quickly recovered, adding 2.3% to close Friday at $329.68. The S&P 500 and Dow Jones Industrial Average rose 0.8% and 0.5%, respectively.

The initial drop came after Bloomberg reported that Peter Bannon, the head of Tesla’s Dojo team, was leaving. Bannon will join DensityAI, which was founded by other former Tesla employees who work on the auto maker’s Dojo, which is a Tesla-designed AI supercomputer used to train cars to drive themselves and humanoid robots to do useful tasks. Musk has ordered the Dojo design effort to shut down, according to the report.

Tesla didn’t immediately respond to a request for comment, but Musk said on X Thursday night: “It doesn’t make sense for Tesla to divide its resources and scale two quite different AI chip designs. The Tesla AI5, AI6, and subsequent chips will be excellent for inference and at least pretty good for training. All effort is focused on that.”

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Tesla will still be designing AI chips, like others, including Alphabet. (Musk recently announced that Samsung will manufacture some of Tesla’s AI chips.) Those chips typically work with Nvidia processors for AI computing. So while losing top talent is never a good thing, the Dojo decision feels like a slightly different strategy for AI computing.

In the end, chips aren’t a product for Tesla to sell; they are a means to an end. Self-driving cars and other AI applications are the company’s focus.

Musk, of course, also runs xAI, an AI company that can offer talent and services to Tesla. “This pushes xAI and Tesla closer together,” Wedbush analyst Dan Ives tells Barron’s. “We see a major investment and partnership on the horizon.”

Tesla doesn’t appear to face much downside from a Dojo closure. Still, the decision is likely to cause some volatility. Morgan Stanley analyst Adam Jonas called Dojo worth $500 billion in a recent report. Jonas adds, however, that “Dojo is the key accelerant at the intersection of hardware and software.” The value for Jonas is Tesla’s ability to create AI applications. That is what investors should remain focused on.

Jonas rates Tesla stock Buy and has a $410 price target for the stock. He is more bullish than average. Overall, 41% of analysts covering Tesla stock rate shares Buy, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for Tesla shares is about $314.

Coming into Friday trading, Tesla stock was up 6.5% for the week, down 20% year to date, and up 68% over the past 12 months.

Write to Al Root at allen.root@dowjones.com