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Be aware of Elon Musk's statements about Tesla's free cash flow




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Elon Musk began Tesla's quarterly earnings last week by drawing attention to the fact that the company" delivered more than 95,000 vehicles, "such as Musk noted the "record for Tesla." This news, along with the announcement of disappointing quarterly sales and earnings results, caught the attention of analysts and investors.

March 26, 2019 – Halifax, Canada – A 2019 red Tesla model 3 plug-in electric car parked in a city street in the center of Halifax.

Getty

What may have escaped the announcement from some investors and even some analysts is Musk's statement that Tesla "is now at the point of being self-financing , "and & nbsp; his having said he expects the firm to be "free cash flow positive in future quarters with possible temporary exceptions to the launch and ramp of new product." In this regard, the slides provided by Tesla to analysts as part of the revenue promotion & nbsp; In the second quarter of 2019, Tesla's free cash flow was $ 614 million.

Investors and analysts would like to draw attention to Musk's statement on Tesla's free cash flow, which is because expected free cash flows form the basis of a company's intrinsic value. Free cash flow typically much less important to investors and analysts than sales and earnings. Among the sales analysts following Tesla, only a few forecasts for free cash flow, most of which have actually predicted that Tesla will not make the free cash flow positive until 2022. Therefore Musk's statement on free cash flow can signal something important about an increase in Tesla's intrinsic value.

Can investors and analysts rely on Musk's statement that Tesla makes positive cash flow positive? & nbsp; As I have written elsewhere Musk does not have a particularly accurate track record when it comes to making specific predictions. However, he is a clear visionary who is exceptionally light and whose performance results are nothing short of extraordinary.

Can investors rely on analysts' free cash flow forecasts? As I have written earlier investors would do well to hold back confidence in analysts' predictions about free cash flows, and therefore on their estimates of intrinsic value.

When it comes to Tesla's free cash flows, there are three things investors should think about balancing. The first point is Musk's statement described above about Telsa's free cash flow that becomes positive.

The second point concerns estimates of Telsa's future share price, and means its consensus target price, which is $ 257. At the end of the week, Tesla traded for $ 228 per share. What the specific target price of $ 257 means is that analysts expect, on average, Tesla's shares to have appreciated by over 12% a year from today's rate.

The other point that investors should take into account is that analysts & # 39; Estimates of what Tesla's equity will be a year are to or below $ 230. In this regard, Morgan Stanley's estimate is $ 230 per share, and UBS estimates are $ 160. & nbsp; These estimates should induce a sense of caution in the minds of investors planning to hold Tesla's shares over the long term. & nbsp; This is because investors who believe in analysts' estimates of intrinsic value can safely conclude that Tesla's shares are overvalued on basic grounds, which means that Tesla's current share price reflects irrational flooding.

Investors who bought the Tesla share for most of the period 2014 to 2016 do not have much to show today in the way of a return. Had they bought the stock between July 2017 and November 2018, their return would actually be negative.

Despite the negative performance of Teslas & nbsp; shares in these periods, Tesla has made great strides in producing electric cars. The mediocre return & nbsp; does not derive so much from that & nbsp; Tesla failed to make progress in achieving its long-term goals, but on Tesla's share price reflecting irrational flooding.

Without any justification based on self-esteem, Tesla's share price rose over two time periods, more specifically April 2013 to September 2013, and December 2016 to June 2017. These irrational flood events set the stage for subsequent returns disappointments.

In summary, Tesla's investors should consider balancing two statements. The first is that Musk predicts that the company's free cash flows will be positive, except for product launches. The second is that Tesla's current share is overvalued on basic conditions.

It is a third point that investors should include in the Tesla calculations. The reason Tesla's sales disappointed analysts despite the record volume is that Telsa reduced the price of its Model 3 in response to competition. Competition is an important factor that generally prevents companies from earning more than their capital costs over the long term. Therefore, while the analysts based their target prices on the assumption that Tesla would be priced at intrinsic value in the year, Tesla is expected to earn more than the long-term capital cost. This suggests that Tesla's shares are even more overrated than analysts estimate.

Some investors buy and hold Tesla's shares because they believe that Tesla is a good company. These investors would do well to understand that stocks in good companies are not often good stocks.

Some investors buy and hold Tesla's shares because they value Tesla's mission to produce electric cars to combat climate change. Doing so is a noble motive, but should be done with open eyes on the risk of holding a stock that is overrated on a fundamental basis.

All in all, Tesla's shareholders want to pay attention to what Elon Musk has announced about Tesla's free cash flow.

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Elon Musk began Tesla's quarterly earnings over the past week by drawing attention to the fact that the company" delivered more than 95,000 vehicles ", which Musk noted was" a record for Tesla. "This news, along with the announcement of disappointing quarterly sales and earnings results, caught the attention of analysts and investors.

26. March 2019 – Halifax, Canada – A red Tesla Model 3 plug-in electric car from 2019 parked on a city street in the center of Halifax.

Getty

What may have escaped the announcement from some investors, and even some analysts, is Musk's statement that Tesla "is now at the point of being self-financing," and he had said th by he reckons with that the company will be "free cash flow positive in future quarters with possible temporary exceptions around the launch and ramp of new product." In this regard, the slides provided by Tesla to analysts as part of the revenue announcement state that Tesla's free cash flow in the second quarter of 2019 was $ 614 million.

Investors and analysts will do well to draw attention to Musk's statement on Tesla's free cash flow. This is because expected free cash flows form the basis of a company's intrinsic value. In addition, free cash flow is typically much less important to investors and analysts than to sales and earnings. Among the sales analysts following Tesla, only a few forecasts report free cash flow. Of these, most have actually predicted that Tesla will not make the free cash flow positive before 2022. Therefore, Musk's statement on free cash flow can signal something important about an increase in Tesla's intrinsic value.

Can investors and analysts rely on Musk's statement about Tesla making free cash flow positive? As I have written elsewhere, Musk does not have a particularly accurate track record when it comes to making specific predictions. However, he is a clear visionary who is exceptionally light and whose performance results are nothing short of extraordinary.

Can investors rely on analysts' free cash flow forecasts? As I have written earlier, investors will do well to hold back confidence in analysts' predictions of free cash flows, and therefore on their estimates of intrinsic value.

When it comes to Tesla's free cash flows, there are three things investors should think about balancing. The first point is Musk's statement described above about Telsa's free cash flow that becomes positive.

The second point concerns estimates of Telsa's future share price, which means its consensus target price, which is $ 257. At the end of the week, Tesla traded for $ 228 per share. What the specific target price of $ 257 means is that analysts expect, on average, Tesla's shares to have appreciated by over 12% a year from today's rate.

The other point that investors should take into account is that analysts & # 39; Estimates of what Tesla's equity will be a year are to or below $ 230. In this regard, Morgan Stanley's estimate is $ 230 per share, and UBS estimates are $ 160. These estimates should induce a sense of caution in the minds of investors planning to hold Tesla's shares over the long term. This is because investors who believe in analysts' estimates of intrinsic value can safely conclude that Tesla's shares are overvalued on basic grounds, which means that Tesla's current share price reflects irrational flooding.

Investors who bought the Tesla share for most of the period 2014 through 2016 have not much to show today in the way of a return. Had they bought the stock between July 2017 and November 2018, the return would actually be negative.

Despite the negative performance of Tesla's shares during these periods, Tesla has made great strides in producing electric cars. The mediocre return does not come as much from Tesla as it does not succeed in achieving its long-term goals, but on Tesla's share price reflecting irrational flooding.

Without any justification based on the consideration of intrinsic value, Tesla's share price rose over two time periods, specifically April 2013 to September 2013, and December 2016 to June 2017. These irrational flood events set the stage for subsequent return disappointments.

In summary, Tesla's investors should consider balancing two statements. The first is that Musk predicts that the company's free cash flows will be positive, except for product launches. The second is that Tesla's current share is overvalued on basic conditions.

It is a third point that investors should include in the Tesla calculations. The reason Tesla's sales disappointed analysts despite the record volume is that Telsa reduced the price of its Model 3 in response to competition. Competition is an important factor that generally prevents companies from earning more than their capital costs over time. Therefore, while the analysts based their target prices on the assumption that Tesla would be priced at intrinsic value in the year, Tesla is expected to earn more than the long-term capital cost. This suggests that Tesla's shares are even more overrated than analysts estimate.

Some investors buy and hold Tesla's shares because they believe that Tesla is a good company. These investors would do well to understand that stocks in good companies are not often good stocks.

Some investors buy and hold Tesla's shares because they value Tesla's mission to produce electric cars to combat climate change. Doing so is a noble motive, but should be done with open eyes on the risk of holding a stock that is overrated on a fundamental basis.

All in all, Tesla's shareholders will do well to consider what Elon Musk has announced about Tesla's free cash flow.


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