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Tesla's Wild Valuation Is Starting to Make Sense

By Daniel Sparks – Oct 31, 2020 at 9:03AM

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The electric-car maker's free cash flow in Q3, combined with Tesla's rapid growth, is starting to make a strong case for the stock's huge market capitalization.

In this segment from Fool Live, Senior Consumer Goods & Industrials Specialist Asit Sharma and senior technology specialist Daniel Sparks put the spotlight on Tesla's (TSLA 3.78%) improved bottom line.

The electric-car maker has gone from burning through huge sums of cash to generating well over $1 billion of free cash flow in a single quarter. As the automaker continues to scale its business, Tesla could generate massive profits in the years ahead.

In this video, Daniel takes a closer stock at Tesla's free cash flow and what it means for the stock's valuation.

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Asit Sharma: So in terms of the profit on the books and the cash flow, they've had a few quarters here, and I'm not sure that these are actually sequential -- you can remind me -- but it seems like they're hitting a scale where they're able to cross that chasm and show some net income on the books, show some positive operating cash flow. Any thoughts on that?

Daniel Sparks: Yeah, I meant to highlight that, as well. I got carried away in the demand story there, but they are, they really have shown they can be consistently profitable. So $0.76 per share and a non-GAAP basis is $0.27 per share on a GAAP basis, the analyst estimate was around $0.50 cents, I think at $0.55 cents (non-GAAP) or so. Seventy-six cents was up 105% year over year, but free cash flow, which is, I think, at a fast-growing company that's very capital-intensive, gives you more insight into the way the business is scaling. They brought in $1.4 billion in a single quarter. Going into this quarter, the trailing 12-month free cash flow was $800 million. It's enormous. The transformation here is definitely real. I think that people who doubted Tesla, there might have been a lot of good reasons for their doubts a few years ago. But I think the story has changed drastically because they've hit a critical point. I think that investors should really revisit the valuation. I mean, $1.4 billion in a single quarter -- you push that out four quarters and you're talking, they could substantiate a pretty wild valuation, especially with their growth rates.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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