cumulative free cash flow could amount to $500 billion by roughly the end of the decade, an unprecedented amount in the auto industry—or any other, for that matter.
That’s what was on the mind of one
bull Tuesday. Analyst Pierre Ferragu also weighed in with his idea of what the electric vehicle maker should do with all that cash.
Investors were feeling good Tuesday, too. Shares of Tesla (ticker: TSLA) were up 1.7%. The S & P 500 was flat and Nasdaq Composite was up 0.2%.
Being a bull, Ferragu rates Tesla (ticker: TSLA) Buy. And he projects big numbers. His $1,580 price target is the highest tracked by Bloomberg by almost $100 and he values the company at about $1.6 trillion, more valuable than all U.S. companies except
are expected to generate free cash flow of about $100 billion and $115 billion a year on average for the coming three years. Those two companies, along with Google parent
(GOOGL), are the only three in the U.S. that could top Tesla’s $500 billion between now and 2030 if Ferragu turns out to be correct.
Ferragu estimates Tesla’s 2023 free cash flow of roughly $22 billion. By 2030, the amount grows to about $120 billion. Wall Street’s consensus for next year is about $15 billion.
Underpinning Ferragu’s projections are volume growth and leading profit margins.
Ferragu thinks Tesla can sell 20 million units by the end of the decade, a volume growth of almost 40% a year on average for the next eight years. Still, that volume would generate, perhaps, only $300 billion in cumulative free cash flow if Tesla were to produce margins in line with
Margins have to be better, too. By 2030, Ferragu expects free cash flow generate per unit sale at Tesla to be 50% to 100% better than what the industry produces today.
His is a bold goal, but he has reason for optimism on the margin front. Tesla already produces industry leading margins. Gross profit margin in the second quarter came in at 25%. Gross profit margins at BMW and Toyota came in at 17% and 16%, respectively.
Better gross profit margins are made up of a few things. Price is one. Tesla generates revenue of roughly $66,500 per vehicle sold, almost $1,000 more than BMW and more than double Toyota.
Cost is another. Both BMW and Tesla, for example, make premium vehicles with more features. Yet, Tesla spent roughly $4,500 less per vehicle than BMW on materials and labor. And Tesla manages cost by not relying on a traditional dealer network. Dealer gross profit per car can amount to a few thousand dollars per vehicle. Instead, that’s profit for Tesla.
Now, 2030 is a ways off. And more auto makers are going to make a lot more EVs with the goal of toppling Tesla. They want more market share and more profit. Just how it turns out is anyone’s guess.
But if Ferragu turns out to be right, investors have an important question to answer: What will Tesla do with the cash? Free cash flow comes after spending on plants and equipment.
Ferragu believes Tesla should turn that cash around and invest in the energy transition. He estimates that $400 billion of Tesla free cash flow—with debt and investing partners—could finance up to $3 trillion of renewable power generation.
Tesla’s stake in all that power would amount to another earnings stream for investors.
Write to Al Root at firstname.lastname@example.org
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