Shares of electric vehicle maker Tesla (TSLA 0.64%) have risen more than 70% over the past 30 days. A surge like this should merit some skepticism from investors. After all, the stock's valuation has changed dramatically in a very short period of time. Does the state of the underlying business really justify such a substantially more optimistic view than Wall Street was giving the company a month ago?
While the stock's valuation is definitely pricey today, the company does have one thing going for it that really helps drive home why Tesla is winning over the hearts and minds of investors: It has become a cash cow, generating billions in cash for shareholders every quarter.
Huge free cash flow
While Tesla's 51% year-over-year increase in revenue in 2022 was impressive, the automaker's increase in free cash flow at the same rate to more than $7.5 billion is what is arguably the main event for investors interested in the stock. The fact that the electric car maker has been able to grow revenue, invest aggressively in its business, and increase free cash flow rapidly all at the same time is a testament to the scale of and execution of Tesla's operating model.
To put this achievement into perspective, consider that Tesla generated this cash flow while laying out $7.1 billion on capital expenditures last year. Capital expenditures represent investments into things like new factories, factory expansion, and new tooling -- and they come on top of the company's normal operating expenses.
During Tesla's fourth-quarter earnings call, CEO Elon Musk pointed out that the company achieved that record level of free cash flow "despite the fact that 2022 was an incredibly challenging year due to forced shutdowns, very high interest rates, and many delivery challenges." Its strong performance, he summarized, happened even "in the face of massive difficulties."
Soaring sales will bolster Tesla's war chest
This profitable business model is helping the company amass quite a large war chest of cash. Tesla's total cash and investments increased $1.1 billion sequentially in Q4 to $22.2 billion.
Looking ahead, Tesla will likely be able to continue growing its cash position. A profitable model combined with strong growth will likely mean the company in 2023 will once again generate more cash than it can prudently spend. Analysts, on average, expect Tesla's sales to increase more than 25% this year, fueled by growth in vehicle deliveries.
It's worth noting that any growth in cash flow this year will come, in part, thanks to the investments the company was able to make last year due to its healthy operating cash flow of $14.7 billion. Tesla's cash flow is so strong that it is ultimately fueling the company's aggressive investment in growth opportunities while still allowing it to throw off cash. Even more, Tesla's 2023 capital expenditures could set the company up for even higher cash flow in 2024, and so on. This virtuous cycle could help the company expand its lead in the electric vehicle market.
All of this to say, investors aren't just giving Tesla stock a premium because of its rapid sales growth. Its valuation is increasingly supported by a rapidly growing stream of cash flow, too.
