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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 TSLA stock to do quite well this year. Indeed, in the long term, having a high and rising level of FCF is a very powerful force that pushes a stock higher.
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Tesla is very good at producing its numbers for investors. It has already publicly announced its production and deliveries for the fourth quarter (Q4) and the full year. This helps analysts refine their revenue projections.
As a result, I suspect that TSLA stock will rise in a 10% to 45% higher range by the end of the year. This article will describe why.
Where are things at Tesla
On January 2, Tesla released its production numbers for the fourth quarter and the full year. It produced 930,422 electric vehicles (EVs) in 2021 and 305,840 in the fourth quarter. The fourth quarter figure was about 25% higher than the third quarter production figure of 237,823.
Additionally, its fourth-quarter deliveries were 308,600 EVs, up 27.9% from third-quarter deliveries of 241,300. stocks have been reduced. As a result, this will drive free cash flow growth in the fourth quarter as it translates into increased cash sales.
As I highlighted in my last post on Nov. 1, Tesla produced $1.3 billion in free cash flow, as shown at the start of its Q3 slideshow. They aptly describe this as “operating cash flow minus capital expenditures”.
Given that third-quarter sales were $13.757 billion, this equated to an FCF margin of 9.5%. This is a very high margin, and I expect it to increase in 2022 as well. This was significantly higher than the FCF margin in Q2 which was 5.09%.
One reason for this is that analysts are expecting significantly higher revenue by the end of 2022. For example, there are currently 36 analysts with an average revenue forecast of $73.29 billion. for 2022. That’s 41.1% more than their average forecast of $51.93 billion for 2021.
Estimation of FCF and the value of Tesla
So, since sales will be significantly higher, you can expect FCF to jump as well. I expect the FCF margin to reach 15% by the end of 2022, at least on a current basis.
Therefore, using this metric, Tesla could reach $11.3 billion in FCF on a run rate basis by the end of 2022. This is the result of multiplying an expected margin of 15% in FCF by estimating revenues of $75 billion.
This has huge implications for the valuation of TSLA shares. If we use an FCF return metric, we can arrive at a target valuation. To do this, simply divide the FCF forecast by the FCF yield.
For example, assuming $11.3 billion in FCF for 2022 and dividing that by a 1% return in FCF, the stock has a market value of $1.13 trillion, or $1.13 trillion. This equates to a gain of at least 10% from the current market value of $1.03 trillion.
And that’s just a minimum. For example, if margins increase to 20%, the FCF forecast increases to $15 billion. At a return of 1% FCF, this equates to $1.5 trillion in target market value. This is approximately 45.6% more than the current market value of $1.03 trillion (i.e. +45.6%).
What to do with TSLA stocks
Tesla has yet to announce when it will release its fourth quarter and full year 2021 results. However, investors will be eager to see what the actual free cash flow (FCF) results will be for the fourth quarter. This will help decide what margin can be expected for 2022 results. And it helps establish its price target.
Following our current forecast, I can predict that TSLA stock could be 10% to 45% higher than today. This corresponds to a target price 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.
As of the date of publication, Mark R. Hake did not hold any position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and execute the Guide to Total Return Value which you can view here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.