All Eyes Are on Tesla’s Upcoming Q3 Earnings Release and Its Free Cash Flow

Tesla (NASDAQ:TSLA) is set to release its third-quarter revenue and earnings figures on Wednesday, Oct. 20, after the market closes. Investors will likely push TSLA stock higher if the company shows revenue growth and profits consistent with prior quarters.

TSLA stock: Tesla Super Charging station on Stockdale Hwy and the 5 fwy. Tesla Supercharger stations allow Tesla cars to be fast-charged at the network within an hour.

Source: Sheila Fitzgerald / Shutterstock.com

That couldn’t come at a better time for the stock. At $843.03 as of Oct. 15, it has finally dug itself out of the trough it hit on March 8 and again on May 19.

Moreover, as of Oct. 15, TSLA stock is up 19.5% year-to-date (YTD) from where it ended last year at $705.67 per share. This is still just slightly better than the S&P 500 index’s return of 19.1% YTD. Maybe with excellent Q3 results, Tesla will be able to significantly outperform the market.

Where Things Stand With Tesla

Moreover, investors already have a clue about where the numbers will likely lead. This is because the company released its Q3 electric vehicle (EV) production and deliveries on Oct. 2.

The numbers already show Tesla has had a blowout quarter. For example, it delivered a total of 241,300 EVs. This was 19.9% higher than the prior quarter deliveries of just 201,500.

That implies its annual deliveries could reach close to 1 million units (i.e., 965,200) assuming virtually no growth. But assuming that growth continues at this breakneck speed each quarter, then deliveries could more than double to 498,700 units in the quarter one year from now. This is based on a compound growth rate of 19.9% per quarter, which works out to a result of 106.7% over four quarters.

Therefore, assuming prices stayed flat, Tesla’s revenue could be at least 19.9% higher than last quarter. I like to compare recent results to those from the prior quarter since Tesla is a very fast-growing company. This will give a better sense of growth going forward.

Moreover, Tesla has now had four full quarters of positive free cash flow (FCF) as of the Q2 earnings release. It made $619 million in FCF during Q2, which worked out to an FCF margin of 5.18% of its $11.958 billion in total revenue.

We can use this to estimate the company’s value going forward.

What Tesla Stock Is Worth

Seeking Alpha indicates that 32 analysts believe revenue will reach $50.85 billion this year and $67.79 billion next year. That represents sales growth of 33.3% over the coming year.

So, in a simplistic model, if we take 5.2% of this year’s forecast sales, FCF could reach $2.64 billion. Likewise, Tesla could see FCF of $3.53 billion by the end of next year.

However, I suspect the FCF margin will rise a good deal by the end of next year with one-third higher sales. Let’s assume it will reach 10% by the end of 2022. In that case, FCF could climb as high as $6.78 billion.

We can use this to estimate its target value in one year. For example, right now TSLA stock sports an FCF yield of 0.31%. This is based on its FCF of $2.624 billion in the last 12 months. As Tesla now had a market capitalization of $844.5 billion as of Oct. 15, this means its FCF yield is 0.31%.

So, to be conservative, if we use an FCF yield of 0.5%, the target market value will be $1.356 trillion next year. This is seen by dividing $6.78 billion in expected 2022 FCF by 0.5%. This is 60.57% over today’s market cap.

What to Do With TSLA Stock

The $1.356 trillion market cap forecast for next year implies TSLA stock could rise 60.57% to $1,354 per share. This is based on the assumption that Tesla produces a 10% FCF margin and the market values the stock at a 0.5% FCF yield.

However, keep in mind that this valuation metric is in nosebleed territory. It only makes sense for the company’s FCF margins to move dramatically higher with higher revenue. This is called operating leverage.

So, analysts will be looking for evidence that the FCF margin has improved in Q3 compared to Q2. If not, the stock might end up retracing some of its gains.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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