Tesla (NASDAQ:TSLA) produced a stellar earnings report for the fourth quarter ending Dec. 31 on Jan. 26. It produced $2.8 billion in free cash flow (FCF), or over twice the $1.3 billion last quarter. Other profitability measures were just as good. This sets the stage for TSLA stock to soar over the coming year.
But I guess someone forgot to tell the market. Since announcing those results, TSLA stock is down 11.2% from $937.41 on Jan. 26 to $832.40, as of mid-day Jan. 28 before rebounding somewhat. But that is not it. The stock peaked at the close on Nov. 10 at $1,229.91. Tesla lost over 32% from this peak price. Moreover, year-to-date (YTD) TSLA stock is down 12% from $1,056.78 at the end of the year.
None of this makes much sense, though, to any objective analyst looking at the potential upside in profitability for TSLA stock.
Tesla’s Potential Upside
Tesla pointed out in its earnings report that it has the highest quarterly operating margin among all volume original equipment manufacturers (OEMs). The Q4 operating margin was 14.7% in Q4, up from 14.6% in Q3 and 5.4% in Q4 a year ago.
Moreover, it produced over $5 billion in free cash flow (FCF) during all of 2021. This was even after it spent $6.5 billion to build two new electric vehicle (EV) factories in Austin, TX, and Berlin-Brandenburg.
But here is the most important part. Now that both of these factories are built, the capex spending will likely decrease. Its free cash flow will soar, and not only from lower capex spending. It will also soar from the higher amount of production, revenue and operating cash flow from two new plants.
Given that revenue was $17.7 billion in Q4, its FCF margin was 15.8% in Q4. Assuming at least $15 billion to $20 billion in FCF next year, its FCF margin, based on $80.48 billion in sales forecast next year, its FCF margin will rise to $18.6% to 24.85% by the end of 2022.
By that time, the market will have come to its senses. TSLA stock will no longer be trading anywhere near its price today.
What Tesla Stock Could Be Worth
For example, let’s assume that Tesla’s FCF margin averages 16.2% or three times its 5.4% FCF margin during 2021. That will raise FCF projections to $13 billion (i.e., 0.162 x $80.48 billion).
We can use this to estimate its fair value by the end of 2022. For example, using a 1% FCF yield metric, the stock could be worth $1.3 trillion. This is seen by dividing $13 billion by 1%, for a result of $1,300 billion, or $1.3 trillion.
As of today, Tesla has a market capitalization of $940 billion or so. This means that its upside is 38.3% from here (i.e., $1,300 billion/$940 billion- 1= 38.3%). In other words, TSLA stock is worth 1.383 x $936, or $1,294 per share.
What To Do With TSLA Stock
By the end of 2023, analysts project sales of over $100 billion.
Here is an easy way to estimate its value then. Assume a 20% FCF margin and a 1% FCF yield.
Therefore its FCF could be $20 billion and its market value could reach $2 trillion (i.e., $20 billion/0.01). That is 112.8% over today’s $940 billion market cap.
It means by the end of 2023 TSLA stock could rise by 112.8% to nearly $2,000 per share (i.e., 2.128 x $936 = $1991 per share).
In other words, TSLA stock is set to soar from here, based on the company’s huge free cash flow. At some point, the market is going to realize this and there will be a huge turnaround in TSLA stock.
Even if it takes two years for TSLA stock to rise 112%, the average annual compounded return will be 46% annually for the next two years. This means that TSLA stock is worth $1,300 per share this year alone.
Long-term investors will recognize this great buying opportunity now in TSLA stock and take advantage of it. It’s not likely to last very long as value investors swoop in and buy shares.
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.
