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Tesla Inc (TLSA) stock still has at least 24% upside to $318 per share. This is based on its present 0.46% yield metric on next year's forecast free cash flow (FCF). We can estimate this FCF by using its trailing 12 months' (TTM) FCF margin.
While waiting for this to happen existing shareholders can make extra income by shorting out-of-the-money puts This works best for put options in near-term expiry periods.
As of morning trading on Dec. 26, TSLA stock was at $256.94. My target price is $318.00 based on its FCF, an upside of over$61 per share, or +24%. The average of 37 analysts surveyed by AnaChart.com shows that it could rise $10.48 to $263.08 per share.
Moreover, shareholders who short its Jan. 12 put options at the $240 strike price, about 3 weeks from now, can make an extra 1.56%. That strike price is over 6.7% out-of-the-money (OTM). More on this below.
Free Cash Flow Estimates
I discussed Tesla's positive free cash flow (FCF) in my Nov. 19 Barchart article, “Tesla's Earnings Should Be Better in Q4 - Short TSLA Puts Now for Income.” This article pointed out that the company generated $0.8 billion in FCF after having made $1.0 billion in FCF during Q2.
That positive FCF still represented an FCF margin of 3.4%, as its Q3 revenue was $23.35 billion (i.e., $0.8b/$23.35b -1 x100 = 3.43%).
Moreover, in the TTM period to Sept. 30, 2023, it produced $3.714 billion on revenues of $95.924 billion. That works out to a TTM margin of 3.87%. We can use that to forecast its next 12 months (NTM) FCF.
For example, 43 analysts surveyed by Seeking Alpha estimate its revenue next year will rise to $118.19 billion. Therefore, applying a 3.87% FCF margin to this we get a forecast of $4.57 billion.
We can use that to forecast Tesla's stock price.
Targeting the TSLA Stock Price
We can use an FCF yield metric to value TSLA stock. For example, based on its market cap today of $802.8 billion, its TTM FCF of $3.714 billion works out to 0.46% of its market cap. That means its FCF yield today is 0.46%.
So if we divide our NTM FCF estimate of $4.57 billion by 0.46% we get a target market cap of $993.5 billion, or almost $1 trillion. That represents an upside of almost 24% from here (i.e., $993.5b/$802.8b-1=+23.75%).
That implies that TSLA stock could by 23.75% to $317.86 per share.
Existing shareholders can make extra income while they wait for this to happen by shorting out-of-the-money (OTM) puts.
Shorting OTM Puts for Income
As I mentioned above the Jan. 12 put options show that the $240 strike price trades for $3.75 on the bid side. That represents an immediate yield of 1.56% (i.e., $3.75/$240).
This means that an investor who owns TSLA stock, after securing $24,000 in cash and/or margin with their brokerage firm (i.e., 100 shares x $240), can short this strike price for expiration on Jan. 12. That will generate immediate income of $375 to their account.
And unless the stock falls to $240 per share on or before Jan. 12, their account will not be obligated to buy 100 shares at $240. So, if this can be repeated every 3 weeks for a year, the annualized expected return (ER) to the investor is $6,375 (i.e., $375 x 17).
This is because there are 17 periods of 3 weeks in a year. That works out to an ER of 26.57% (i.e., $6,375/$24,000). The downside protection is over 6.7%. But even if that happens, the shareholder will not have to sell their existing shares. They will only be buying more shares with the cash and/or margin that was previously secured with the brokerage firm. That may result in an unrealized loss.
But at least they can either hold on until the stock rises to its price target or also sell covered calls against those shares to create extra income.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
