Tesla Stock Poised for a 24% Upside Based on Strong FCF

Tesla Stock

Shares of Tesla Inc (NASDAQ:TSLA) are projected to see a substantial 24% increase, reaching $318 per share, driven by the company’s robust free cash flow (FCF) and a current yield metric of 0.46% on next year’s forecast FCF. The estimation of this FCF is derived from the trailing 12 months’ (TTM) FCF margin.

While anticipating this upward trend, existing shareholders have an opportunity to boost their income by engaging in short positions for out-of-the-money puts, particularly in near-term expiry periods.

As of the morning trading session on Dec. 26, TSLA stock was valued at $256.94. My target price of $318.00, based on the FCF, reflects an impressive upside of over $61 per share or +24%. Analysts surveyed by AnaChart.com, averaging 37 in total, suggest a potential increase of $10.48, reaching $263.08 per share.

Additionally, shareholders have the option to short Jan. 12 put options at the $240 strike price, approximately three weeks from now, with the potential to earn an extra 1.56%. Notably, this strike price sits over 6.7% out-of-the-money (OTM).

Estimates on Free Cash Flow

The positive FCF, representing a margin of 3.4%, aligns with Q3 revenue of $23.35 billion. In the TTM period ending on Sept. 30, 2023, Tesla generated $3.714 billion from revenues totaling $95.924 billion, resulting in a TTM margin of 3.87%. This figure is instrumental in forecasting the next 12 months (NTM) FCF.

Analysts surveyed by Seeking Alpha anticipate a rise in revenue next year to $118.19 billion, translating to a forecasted FCF of $4.57 billion based on a 3.87% margin.

Targeting TSLA Stock Price

Utilizing the FCF yield metric to assess TSLA stock, the current market cap of $802.8 billion, coupled with TTM FCF of $3.714 billion, yields a 0.46% FCF yield. Dividing the NTM FCF estimate of $4.57 billion by 0.46% suggests a target market cap of $993.5 billion, nearly $1 trillion. This indicates an impressive upside of almost 24%.

Shorting OTM Puts for Additional Income

In consideration of the Jan. 12 put options, the $240 strike price trading at $3.75 on the bid side provides an immediate yield of 1.56% ($3.75/$240).

An investor owning TSLA stock, with $24,000 secured in cash and/or margin (i.e., 100 shares x $240), can short this strike price for expiration on Jan. 12, generating immediate income of $375. Unless the stock falls to $240 per share on or before Jan. 12, the investor’s account is not obligated to buy 100 shares at $240. If this strategy is repeated every three weeks for a year, the annualized expected return (ER) to the investor is $6,375 (i.e., $375 x 17), equivalent to an ER of 26.57% ($6,375/$24,000).

Even in the event of a 6.7% downside, the shareholder is not obligated to sell existing shares but may choose to hold until the stock rises to its target price or sell covered calls against those shares for additional income.

Featured Image: Unsplash

Please See Disclaimer

About the author: I am a writer and an editor with experience in publishing, research, and SEO strategies. I have an honors BSc in Social Work from the University of Benin, Nigeria.