Investors should expect that Tesla, Inc. (NASDAQ:TSLA) will produce significantly higher free cash flow (FCF) in 2022 than ever before. As a result, I expect that TSLA stock should do quite well this year. This is because over the long run, having a high and growing level of FCF is a very powerful force that pushes a stock higher.
Tesla is very efficient in producing its numbers for investors. It has already publicly announced its fourth quarter (Q4) and full-year production and deliveries. This helps analysts to refine their projections for revenue.
As a result, I suspect that TSLA stock will move higher in a range of 10% to 45% higher by the end of the year. This article will describe why.
Where Things Stand At Tesla
On Jan. 2, Tesla reported its Q4 and full-year production numbers. It produced 930,422 electric vehicles (EVs) during 2021 and 305,840 during Q4. The Q4 number was around 25% higher than the Q3 production number of 237,823.
In addition, its Q4 deliveries were 308,600 EVs, or 27.9% over the Q3 deliveries of 241,300. This is higher than the Q4 production growth of 25% and implies that inventories were drawn down. As a result, this will push free cash flow growth during Q4 as it results in higher amounts of sales cashed out.
As I pointed out in my last article on Nov. 1, Tesla produced $1.3 billion in free cash flow as detailed at the beginning of their slide deck for Q3. They rightly describe this as “operating cash flow less capex.”
Since sales in Q3 were $13.757 billion, this worked out to an FCF margin of 9.5%. That is a very high margin, and I expect it will rise during 2022, as well. This was significantly higher than the FCF margin in Q2 which was 5.09%.
One reason for this is that analysts expect significantly higher revenue by the end of 2022. For example, right now there are 36 analysts whose average revenue forecast is $73.29 billion for 2022. That is 41.1% more than their average forecast of $51.93 billion for 2021.
Estimating FCF and Tesla’s Value
So, since sales will be significantly higher, you can expect that FCF will jump, as well. I expect that the FCF margin could reach 15% by the end of 2022, at least on a run-rate basis.
Therefore, using this measure, Tesla could reach $11.3 billion in FCF on a run-rate basis by the end of 2022. This is the result of multiplying a forecast 15% FCF margin by the revenue estimate of $75 billion.
This has huge implications for the valuation of TSLA stock. If we use an FCF yield metric we can come up with a target valuation. The way to do this is by dividing the FCF forecast by the FCF yield.
For example, assuming $11.3 billion in FCF for 2022 and dividing it by a 1% FCF yield, gives the stock a market value of $1,130 billion, or $1.13 trillion. That works out to at least a 10% gain over the market value today of $1.03 trillion.
And this is just a minimum. For example, if margins rise to 20%, then the FCF forecast rises to $15 billion. At a 1% FCF yield that works out to $1.5 trillion in a target market value. That is about 45.6% higher than the $1.03 trillion market value today (i.e, +45.6%).
What to do With TSLA Stock
Tesla has not yet announced when it will report its Q4 and 2021 full-year results. However, investors will be keen to see what the actual free cash flow (FCF) results work out to for Q4. This will help to decide what margin can be forecast for 2022 results. And that helps set up its price target.
As a result of our forecast now, I can forecast that TSLA stock could range from 10% to 45% higher than today. That works out to a price target range of $1,164 per share (i.e., 1.10 x $1,058) to $1,534 (i.e., 1.45 x $1,058) per share.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this 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 Newsbreak.com and runs the Total Yield Value Guide which you can review here.
