Tesla's Free Cash Flow Surges To New Heights

Mark Hake

Tesla (TSLA) stock surged to over $1 trillion this week after the company reported huge gains in sales and free cash flow (FCF).

The stock closed Friday, Oct. 29, at $1,114.00 per share. That gives it a market capitalization of $1.119 trillion, according to Yahoo! Finance.

This is after the company reported revenue growth of 57% year-over-year in Q3 on Oct. 20. Moreover, the company's operating surged to $2.0 billion with an operating margin of 14.6%

In addition, Tesla said its free cash flow (FCF) was now $1.3 billion. This represents a 9.6% FCF margin.

FCF represents the total cash flow during any period after all expenses, plus all changes in working capital and capital expenditures. It is a common measure used to signify a company's unrestricted cash flow.

Tesla's Growth

Tesla's deliveries of electric vehicles were up 73% YoY according to its earnings presentation slide deck. This is what drove the company's 57% growth in sales over the past year.

That is quite an achievement despite other car manufacturers' issues with chip shortages. Moreover, Tesla indicated that it expects to receive final approval to begin shipping out of its Berlin-Brandenburg, Germany, plant before the end of the year.

The same is true for its new plant in Austin, Texas. Tesla expects to begin production of its Model Y SUV EV before the end of the year.

Moreover, the company still expects that its growth rate will stay elevated. Here is what management said about its future deliveries:

"Over a multi-year horizon, we expect to achieve 50% average annual growth in vehicle deliveries."

That should provide growth in its operating margins as well:

"We expect our operating margin will continue to grow over time, continuing to reach industry-leading levels with capacity expansion and localization plans underway."

Where This Leaves TSLA Stock

If we estimate that Tesla could make an average 15% FCF margin over the next year (up from 10% this past quarter) and 20% FCF margin in 2022, TSLA stock could move substantially higher.

My best estimate is that, based on analysts' estimates of $89.3 billion in revenue by 2023, FCF could reach $17.83 billion by then.

Using an FCF yield metric of 0.50%, this gives it a possible market value of $3.57 trillion. After discounting it a 10% present value rate over the next 2 years, the present value is $2.883 trillion.

This implies that TSLA stock could move up 157% over the next 2 plus years to the end of 2023. That works out to a 52% average annual gain on a compounded basis.

In other words, TSLA stock could potentially move up 52.2% from $1,114 to $1,696 per share over the next year.

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This is not financial advice and you should not rely on my analysis to buy or sell any stock or crypto, as I am not undertaking to induce you to buy or sell securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

This represents my analysis of Tesla stock and it is not meant to provide you with specific advice in your own situation. I do not presently own TSLA stock or related securities, but I may buy some of these in the coming weeks.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

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