Tesla Stock: FCF is firing on all cylinders (NASDAQ: TSLA)

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Despite the challenges of its production situation, Tesla (NASDAQ: TSLA) is in the best financial situation of its existence. The electric vehicle maker just reported the highest quarterly profit in company history and growing vehicle margins. from Tesla free cash flow (and margins) soar. Although COVID-19 lockdowns in China pose a risk to Tesla’s ramp-up of production and deliveries in fiscal 2022, stocks continue to have an attractive risk-reward ratio!

Tesla far exceeds estimates

Tesla beat forecasts for its first quarter revenue map yesterday. The electric vehicle company reported revenue of $18.76 billion compared to the average forecast of $17.80 billion. Earnings were also much better than expected, with the actual EPS figure falling from $0.91 in the prior year period to $3.22 in Q1’22. The prediction was for EPS of $2.26. Tesla’s much better earnings were fueled by strong vehicle deliveries despite significant challenges to the company’s production situation in Shanghai and continued margin gains.

Tesla Q1

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High level of deliveries despite challenges

Tesla’s Gigafactory in Shanghai has closed since the end of March due to new outbreaks of COVID-19 in China. Chinese authorities reacted forcefully to these new outbreaks and instituted severe containment measures to prevent the spread of the coronavirus. Tesla is said to have begun preparations for a full reopening from its Shanghai manufacturing plant last week.

Despite factory closures in late March, which further disrupted the supply chain, Tesla produced 305,407 electric vehicles, mostly 3/Y models, in the first quarter of 2022, posting 69% year-on-year growth. the other. The rate of production growth, given Tesla’s high level of production, is truly impressive. Total deliveries in Q1’22 soared 68% year-over-year to 310,048 EVs, with 95% of products being Model 3s and Ys. I estimate Tesla will deliver 1.4 million EVs in the course of in FY2022, mostly Model 3s and Model Ys, implying 50% year-over-year shipment growth.

Tesla Production/Deliveries

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Tesla crossed the 300,000 shipments threshold for the first time ever in the fourth quarter of fiscal 2021. Due to supply issues, Tesla was unable to generate production and shipment growth of materials in the first quarter of 2022. Primarily due to the massive ramp-up of Model 3s and Model Ys, I believe Tesla’s free cash flow will continue to soar in fiscal years 2022 and 2023.

Tesla Quarterly Deliveries

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Record profits thanks to a strong delivery ramp and higher automotive margins

Due to Tesla’s massive production ramp-up in fiscal year 2021, Tesla achieved record revenue and profits in the first quarter of 2022. Total automotive revenue soared 87% from year-over-year to $16.86 billion, while profits jumped 658% year-over-year to a record $3.3 billion. Tesla’s earnings growth was particularly driven by the company’s growing size and rising vehicle gross margins. Sales of regulatory tax credits pushed Tesla’s automotive gross margins to a record 32.9% in Q1’22.

Automotive gross margins

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Increase in free cash flow margins, improvement in FCF conversion

Tesla is now largely profitable with respect to GAAP earnings and has proven it can increase automotive gross margins even in a tough industry environment. But the real story, I believe, is Tesla’s skyrocketing free cash flow.

Tesla generated $2.23 billion in free cash flow in the first quarter of 2022, posting 660% year-over-year growth, thanks in large part to the massive ramp-up of model deliveries. 3/Y that Tesla was able to achieve. In the first quarter of 2022, Tesla’s free cash flow margins also more than tripled year over year to 11.9%. Due to ramping up deliveries, I estimate that Tesla could increase its free cash flow margin to 15% next year.

in millions of dollars

Q1’21

Q2’21

Q3’21

Q4’21

Q1’22

Y/Y growth

Total revenue

$10,389

$11,958

$13,757

$17,719

$18,756

80.5%

Net cash from operating activities

$1,641

$2,124

$3,147

$4,585

$3,995

143.4%

Capital expenditure

($1,348)

($1,505)

($1,819)

($1,810)

($1,767)

31.1%

Free movement of capital

$293

$619

$1,328

$2,775

$2,228

660.4%

Free cash flow margin

2.8%

5.2%

9.7%

15.7%

11.9%

321.2%

OCF to FCF conversion

17.9%

29.1%

42.2%

60.5%

55.8%

212.3%

(Source: Author)

In the table above, you can also see that Tesla’s cash flow from operations to free cash flow conversion more than doubled year over year, from 17.9% in Q1′ 21 to 55.8% in Q1’22. This figure means that Tesla converted 55.8 cents of every dollar of operating cash flow into free cash flow, showing a massive improvement in FCF profitability. A normalization of production levels at the Shanghai factory and an easing of the auto parts supply situation has the potential to improve both Tesla’s free cash flow margins as well as conversion rates to the future. Assuming Tesla can grow revenue to $113 billion next year, a 15% free cash flow margin would imply a potential FCF of up to $17.0 billion.

Not cheap, but worth the price

I believe Tesla is the most exciting electric vehicle company in the world. No other company comes close in terms of production capacity, delivery volume and growth prospects. However, this outlook and the expected massive delivery ramp for fiscal year 2022 comes at a price: Tesla is very expensive on a forward sales basis. Although Tesla shares have one of the highest PS ratios in the industry (9.3X PS ratio), Tesla has never been truly cheap. Due to Tesla’s growing scale, higher automotive gross margins, and expected large delivery ramp for this year, I think Tesla’s high sales valuation factor is worth paying. Additionally, Tesla’s fiscal year 2023 revenue estimates continue to rise…

Chart
Data by Y-Charts

Risks with Tesla

The biggest risk for Tesla is the new COVID-19 lockdown that is leading authorities to force factory closures, which could lead to further supply chain disruptions. The 3-week shutdown of Gigafactory in Shanghai is going to affect Tesla’s short-term production and delivery outlook, but I think the market has had more than enough time to price a drop in short-term delivery. term in the shares of the company EV.

Another risk I see with Tesla is the company’s high valuation factor. Tesla is one of the most expensive electric vehicle stocks and that’s mainly due to the company’s extraordinary success with its decade-long production and delivery ramp. If Tesla’s delivery and revenue growth slows, investors may reassess Tesla’s valuation factor. What would change my mind about Tesla is if vehicle margins or delivery growth rates decline significantly in fiscal 2022.

Final Thoughts

Tesla FCF is firing on all cylinders, and the electric vehicle firm could see up to $17 billion in free cash flow next year. Assuming Tesla’s Gigafactory in Shanghai reopens and the supply chain situation doesn’t worsen, I can see Tesla hitting 1.4 million EV deliveries this year, implying 50% growth. % year over year. Since the company’s free cash flow margins are also on the rise, Tesla is going to be an even more profitable business in the future than it already is today!

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