- Tesla (NASDAQ:TSLA) is finally recovering and is down just 14.3% year-to-date (YTD) as of Friday, March 18
- There seems to be no end to the demand for its EVs as it has been raising prices, and its free cash flow (FCF) is surging
- Investors should take advantage of this dip in the price, just as I wrote at the end of January when it was at a similar price
Tesla has come through a rough time. The stock took a major dip when the Russian war on Ukraine started at the end of February. It tanked down to $766 several times. But since then, TSLA stock has slowly drifted up. As of Friday, March 18, it stood at $905.39.
Recent Developments at Tesla
The simple truth is that there is still a very strong demand for Tesla’s electric vehicles (EV). In fact, the company has been raising prices across the board, as The Verge recently pointed out.
Needless to say, this is a sign of excess demand. In fact, there were rumors that part of the reason it raised prices was resale and secondary prices of newer models were actually rising, according to Rob Maurer, of Tesla Daily YouTube fame. In his Friday, March 18 video, Rob shows how interest in Tesla vehicles has been spiking. He also shows how resale prices have been climbing, forcing Tesla to raise prices.
The Verge also pointed out that Tesla’s price increases were between 5 and 10%. The cheapest car it sells, the rear-wheel-drive Model 3 now starts at $46,990. Its top-end model, the Model X Tri motor, rose in price from $126,490 to $138,990.
Even more amazing, this was the second price increase in less than one week, according to The Verge, although the prior hikes were only on certain models. This latest round was on all its models.
Another major cause for the increases is the price increases in its raw materials. On March 13, Elon Musk, Tesla’s CEO tweeted about this. He said that “Tesla & SpaceX are seeing significant recent inflation pressure in raw materials & logistics.”
The truth is that inflation in the U.S. is now 7.9% on a look-back basis. But there is good reason to believe that inflation could top 10% very soon, as I recently wrote.
The net result is that these price increases will likely allow the company to keep its excellent margins, despite the effects of inflation. In fact, last year produced very high free cash flow (FCF) margins, as I recently described in my article, “Tesla’s Strong Earnings Imply Upside to $1,300 in the Coming Year.”
Where This Leaves TSLA Stock
Tesla is so incredibly profitable from an FCF standpoint, that FCF was $5 billion in 2021, even though it built out two new large superplants, one in Berlin and the other in Austin, Texas. This included $2.8 billion in FCF during Q4 alone.
Moreover, now that the plants are largely built out, one might assume that the company’s FCF margins might increase from the effects of higher forecast sales, price increases and the reduction of capex spending this year.
For example, last quarter Tesla’s FCF margin was 15.8% in Q4. Assuming it rises to 20% in the next 12 months and using analysts’ sales forecast for 2022 of $82.79 billion, FCF could hit $16.558 billion. To be conservative, let’s just call it $16 billion.
As a result, assuming that TSLA stock will eventually be valued by the market with an FCF yield of between 1% and 1.5% (i.e., 1.25% FCF yield), its market cap could rise to $1.28 trillion. That is 36.8% higher than its $935.7 million market cap as of March 18, according to Yahoo! Finance.
This means that TSLA stock is worth at least $1,239 per share, i.e, 36.8% over its price as of March 18, $905.39. Investors can expect that if its FCF margins come in higher than 20%, the stock will rise higher than $1,239. This is why now is a really good time to be buying TSLA stock.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.