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Tesla’s Free Cash Flow Surges, Pushing TSLA Stock Higher

Tesla (NASDAQ:TSLA) released its stellar third-quarter revenue and earnings figures on Oct. 20, which pushed up TSLA stock higher for the year. The main takeaway is that the electric vehicle maker’s revenue and free cash flow (FCF) are surging higher. As a result, expect TSLA stock to keep moving higher over the next year.

A person walks past the storefront of a Tesla store with several vehicles visible behind a glass door
Source: Ivan Marc / Shutterstock.com

So far this year the stock has risen from $705.67 at the end of Dec. 31, to $1,114.00 as of Oct. 29. That represents a gain of 57.9% year-to-date (YTD). This is significantly higher than the S&P 500’s YTD gains of 22.6% as of Oct. 29.

Moreover, there is every reason to believe that Tesla’s outstanding financial performance will continue over the next year. That could push TSLA stock even higher.

Where Things Stand With Tesla

The first line on page 3 of Tesla’s slide deck focuses on its free cash flow (FCF). Its operating cash flow less capital expenditure resulted in FCF of $1.322 billion. That implies a run rate of $5.288 billion in FCF over the next 12 months.

In addition, since sales were $13.757 billion during the quarter, this means that its FCF margin is now 9.6% (i.e., $1.32b/$13.76b).

That is one of its higher FCF margins. For example, in Q2 its FCF margin was 5.09% (i.e., $609m/$11.958b). The main reason for this is that its sales rose 15% from Q2 to Q3.

In other words, Tesla is benefiting from higher FCF margins as its sales growth exceeded the rate it spent money on operating gross and operating expenses plus its capex spending.

This, in effect, is what operating leverage is all about. As sales rise, they have a leveraged effect on operating and FCF margins. This is because expenses and spending tend to rise at a slower steadier pace.

In fact, this operating leverage concept will help us value TSLA stock going forward.

Tesla’s FCF Estimates

After Tesla’s earnings came out, analysts upgraded their estimates of its forecast revenue over the next two years. We can use these forecasts to estimate Tesla’s FCF going forward.

For example, 33 analysts now estimate on average that Tesla will produce $70.54 billion in revenue next year. That represents a growth rate of over 38% from their 2021 average estimate of $51.03 billion.

Therefore, using a 10% margin (comparable to its Q3 9.6% FCF margin), Tesla could produce $7.054 billion in FCF next year. That is the result of multiplying 10% by the revenue forecast of $70.54 billion for 2022.

But since Tesla’s FCF margins rose from 5% to 10% from Q2 to Q3, I suspect that with higher sales, its margins could keep moving higher over the next year. I suspect they could double to 20% by Q3 or Q4 of 2022. That implies that the average FCF over 2022 will be 15%.

So if we multiply its 2022 forecast revenue of $70.54 billion by 15% Tesla’s FCF could hit $10.58 billion by the end of 2022.

And if we assume that 2023 will have a 20% margin on forecast sales of $89.3 billion, then FCF will reach $17.86 billion by the end of 2023.

So you can see the progression: $5.29 billion in FCF (12 mo. run rate), to $10.58 billion in 2022, to $17.86 billion in 2023. This is typical of a company with huge operating leverage.

What TSLA Stock is Worth

Given these prospects and its huge operating leverage, TSLA stock deserves to have a huge valuation. For example, right now its run-rate FCF of $5.29 billion represents about 0.47% of its $1.12 trillion market cap. That means that its historical FCF yield is about 0.50%.

So if we apply this to the 2023 FCF we can derive its future target market cap. For example, by dividing $17.86 billion (2023 FCF estimate) by 0.5%, we get a market value of $3.572 trillion (i.e., $17.86b/0.005 = $3,572b).

This implies that Tesla could rise 218.9% over its $1.12 trillion market cap as of Oct. 29. But first, however, we have to apply the present value concept to the $3.572 trillion 2023 market value estimate. Using a 10% discount rate over 2.25 years (i.e., from Q3 2021 to the end of 2023) results in a discount factor of 80.7%.

So we multiply $3.572 trillion by 80.7% to derive its present value of $2.883 trillion. This is 157.4% over its present market cap of $1.12 trillion.

What This Means for TSLA Stock

This means that TSLA stock could rise 157.4% over the next 2.25 years. That implies an average annual compound return of 52.2% annually.

In other words, over the next year, I suspect that TSLA stock will be 52% higher at $1,696 (i.e., 1.522 x $1,114 per share).

This is the direct result of the company’s huge FCF growth. That, in turn, is the result of its huge operating leverage. The bottom line is that despite its recent gains, TSLA stock could still move significantly higher.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2021/11/tsla-stock-could-rise-over-50-in-a-year-based-on-its-surging-fcf/.

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