Over the previous yr, on the day after Tesla unveils its newest quarterly report, this author has calculated a metric I name the “Musk Magic” Premium. Put merely, the determine demonstrates how a lot of the EV pioneer’s valuation is defined by its present efficiency, and what portion rests on traders’ wager that Musk will ship super-big on sundry promised improvements, from robotaxis to humanoid robots— areas the place money-making variations haven’t materialized, and maintain getting delayed.
I calculated the metric as soon as once more following Tesla’s report for Q3, issued after the market shut on Wednesday October 22. The corporate reported file gross sales for the quarter. However its horrible revenue numbers stand in evident contract to the current moonshot for the inventory, which has doubled the producer’s market cap since early April, to $1.46 trillion earlier this week. The mix of a ballooning valuation and large revenue declines because the firm’s heyday on the flip of the last decade makes the Magic Premium a Halloween ghoul that’s haunting Wall Avenue.
Tesla’s core earnings are working at about half GM’s
To reach on the Magic Premium, I first deploy a method establishing bedrock, repeatable earnings. To get there I begin with GAAP internet earnings and regulate for 2 objects.
The primary: gross sales of regulatory credit. They’re already declining now that the Trump administration has waived a earlier requirement that U.S. automakers pay what quantity to large penalties to Tesla and different EV-makers for failure to fulfill required targets for producing sufficient inexperienced autos themselves. Musk has acknowledged that the revenue stream from these funds will maintain falling, then just about disappear. Second: Tesla books positive aspects or losses on its large Bitcoin holdings every quarter. That’s a particular, non-operating merchandise that I additionally exclude by eliminating the positive aspects from earnings (or tacking again the losses).
For Q3, Tesla recorded internet revenue of $1.372 billion. That represents a fall of 37% from the identical three-month span final yr. Subtracting the after-tax contribution from regulatory credit of roughly $300 million, and including again a $62 million loss on digital holdings unrelated to how Tesla’s companies are faring, I get sustainable internet earnings of $1.134 billion ($1.372 billion minus a $238 million internet discount from these non-core objects).
Add that determine to the adjusted earnings for the previous three quarters, and also you get a complete core studying of $3.6 billion over the previous 12 months. That’s about half of what archetypal metal-bender General Motors garnered in the identical span.
So what’s Tesla “price” at the moment, primarily based on the cash it’s really making (versus the wonders its CEO retains promising)? If we award a PE of 30, equal to the S&P 500 common—which is very inflated, by the best way, by the share costs of the Magazine 7 together with Tesla—we get “honest worth” of $108 billion (the 30 a number of instances $3.6 billion in earnings). However traders are wagering that the automaker is price $1.46 trillion. The distinction, the worth that rests on Musk’s ever-shifting pledges on what’s to return, quantities to the Musk Magic Premium: on this case, $1.35 trillion. Put one other approach: The promise of gauzy visions that maintain receding like a mirage within the desert accounts for 90% of Tesla’s market cap.
How briskly should Tesla’s earnings increase to develop into the Musk Magic Premium?
At $1.46 trillion, Tesla is promoting at 405 instances repeatable earnings. Now let’s study the heights the inventory should hit to notch even a modest, 10% annual return over the following seven years. To get there, Tesla’s valuation would wish to double to $2.9 trillion.
Producing sufficient earnings to justify that big market cap would require Musk to set a journey of fast-expanding profitability and breakneck progress, and traders alongside for the experience could be braving a chamber of horrors. We’ll be beneficiant and picture that by late 2032, Tesla will sport the identical wealthy PE of 30. In that situation, by then the corporate would wish to provide $97 billion a yr in earnings. That’s roughly what each Microsoft and Apple register at the moment, and their present earnings tower among the many greatest within the annals of capitalism.
Zooming from at the moment’s $3.6 billion run fee to $97 billion means Musk would wish to develop earnings by 60% a yr, yearly, by means of 2032. Within the ultimate 12 months alone, he’d have so as to add tens of billions in additional earnings.
After all, Musk has labored miracles up to now. However this Halloween, chasing away the ghouls haunting Tesla seems like a miracle too far.
