(Bloomberg Opinion) -- Three months ago, Tesla Inc. notched up a $9 billion gain in market capitalization in the immediateaftermath of reporting a $143 million quarterly profit. On Wednesday, it reaped $12 billion on $105 million. Dont forget the $50 billion it racked up in between those dates, of course.
Teslas market cap has more than doubled to more than$100 billion since reporting that surprise profit for the third quarter. Besides that boost to confidence, the company also managed to meet the low end of delivery guidance for the fourth quarter, started producing vehicles at its new plant in China, unveiled the Cybertruck and began teasing out details of a planned factory in Germany. The latest quarterly profit and $1 billion of free cash flow for the fourth quarter have evidently kept the momentum going.
As with the previous quarter, the dissonance between the mouse-sized number at the bottom line and the elephantinemarket reaction is deafening, especially given the stock-price surge during the intervening period. Consider, for example, that since Tesla reported full-year results for 2018 a year ago, its market cap has increased by $51 billion ($63 billion if you count Wednesdays immediate after-market action). In the meantime, Teslas annual vehicle salesincreased by 50%, revenue increased by 14% and GAAP net losses shrank only a little, from $976 million to $862 million.
Indeed, just looking at the fourth quarter, vehicle deliveries and energy storage deployments hit records. Yet revenue growth was just 2.2%, year over year, and net income fell 25%. Its worth noting that the $105 million of earnings was more than accounted for by the $133 million of regulatory credits sold in the quarter. As for the $1 billion of free cash flow Tesla reported, more than half is accounted for by those credits, a big working capital swing and$204million of other cash from operations that await some 10K-filing details.
As ever, Tesla bulls are less focused on small earnings and the sharp slowdown in growth, andmore on the promise of what comes next. From that perspective, tiny net profits on record deliveries represent progress rather than dissonance.
Tesla said it would exceed 500,000 vehicle deliveries this year, including the new Model Y, and boost energy-product deployments by at least 50%. Limited volumes of the elusive Tesla Semi truck are also planned. Yet Tesla continues to caveat its expectations of positive free cash flow and GAAP net incomes with the temporary exceptions caused by the launch and ramp-up of new products. The current quarter got additional caveats on the earnings call, centered on seasonal effects and, of course, coronavirus-related impacts.
It has been interesting to watch in recent months as some analysts have raced to catch up with the stock price by tweaking their targets with this or that justification; a big future earnings uplift here, a bump to the multiple there (not the first time weve seen this happen).
At $650, the after-market price is pretty much divorced from any reasonable underlying math. A multiple of forecast GAAP earnings for the year of 275 times is all but meaningless. Tesla has been a terminal value stock for so long, in the sense that its price rests implicitly on long-term profit expectations. But its worth thinking about the numbers for a second.
As of Wednesday evening, the consensus forecasthasTesla flipping from a net loss of almost $5 a share last year to a profit of almost $2.40 in 2020 and then growing at more than 100%, compounded, through 2023. Looking out 10 years, I wondered what sort of earnings Tesla would need in 2029 to justify its stock price, assuming its terminal value in that year accounted forhalf the current market cap. At a 10% cost of capital, it works out to just over $200 per share or an 86-fold increase versus 2020s (forecast) earnings.(1)
CEO Elon Musk summed this all up near the start of Wednesday evenings call with the question, Where will we be in 10 years? Its rhetorical power can be seen in the way investors reset the clock as each set of full-year results passes by.
(1) This exercise assumes earnings as a proxy for free cash flow. I took the current consensus forecast for 2023, $21.61 per share, and then calculated the growth rate through 2029 such that those "cash flows", discounted at 10%, added up to half the share price of $650 (which is where it reached in after-market trading on Wednesday). There is no real rule of thumb on what proportion of the company's value should be accounted for by the terminal value. So 50% is just my assumption, though it would seem reasonable for a company that will have been listed for 20 years at that point.
To contact the author of this story: Liam Denning at firstname.lastname@example.org
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This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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