Tesla Stock Is Off Its Lows and Still Looks Undervalued - Good for Short Put Income Plays

Tesla Inc (TSLA) stock is up about 10% from its recent lows last month, and TSLA still looks undervalued here based on its FCF. Its put option premiums are still high, which is good for short-put plays for income.

TSLA is trading for $178.33 on Tuesday morning, April 9, up about 9.7% from its March 14 close of $162.50. Moreover, this is despite the company's recent release of its quarterly production and deliveries with poor results.

However, the market seems to have already discounted this bad news.

Deliveries Are Down Significantly

For example, said on April 2 that its deliveries for Q1 were just 386,810 electric vehicles (EVs), compared to 484,507 last quarter. Moreover, compared to a year ago in Q1 2023 (422,875 EVs), deliveries this year are down over 8.5% YoY.

That means its results for Q1 are likely to be significantly lower than last year as well as in Q4 2023. 

But, so far, the market seems to have taken this into account and is looking forward to higher demand later in the year. After all, it tends to look forward 6 to 9 months ahead in terms of setting a stock's valuation.

This implies that Tesla's FCF could be much lower as well. That affects its valuation. But my model already takes this into account.

FCF Model for TSLA Stock Valuation

I discussed this in my March 27 Barchart article, “Unusual Activity in Tesla Stock Out-of-the-Money Put Options Is a Good Income Play.” For example, free cash flow (FCF) was $2.064 billion, representing an FCF margin of 8.2%.  However, my valuation model assumed that Tesla would make just a 5% FCF margin going forward.

Nevertheless, analysts' revenue estimates are now 2.78% lower since I wrote that article. The average of 39 analysts' estimates is $105 billion in sales this year (Refinitiv analyst survey, as seen in Yahoo! Finance), down from $108 billion in the article. Moreover, 2025 revenue estimates have fallen 3.3% from $129.33 billion to $125.11 billion. Seeking Alpha's survey of 45 analysts is $106.19 billion for 2024 and $127.52 billion for 2025.

So, the average revenue forecast is between $105.6 billion in 2024 and $126.3 billion in 2025. That implies over the next 12 months, it will be on a run rate of $115.95 billion.

As a result, applying a 5% FCF margin gives us an FCF estimate of $5.8 billion over the next 12 months. We can use that to set a price target for TSLA stock.

For example, assuming Tesla were to pay out this FCF in dividends TSLA stock would likely have at least a 1% yield. That sets its market cap target at $580 billion (i.e., $5.8b/0.01). This is still 2.1% over its market cap today of $567.9 billion. 

Moreover, using a 0.9% FCF yield (MSFT stock has a 0.7% dividend yield, and META has a 0.1% yield), gives a market cap target of $644 billion. That is 13.5% higher than today. 

So there is still good upside left in TSLA stock, despite its lower projected results. The average price target is 2.1% to 13.5% higher or about 8% more, setting the price target at $192 per share.

Shorting OTM Puts for Income

As I discussed in my last article, it makes sense for shareholders to short out-of-the-money (OTM) put options in TSLA stock. For example, look at the May 3 expiry period, which is just over three weeks away (24 days).

It shows that the $160 strike price, which is over 10% below today's price, still has a high premium of $4.30 per put contract. That means that an investor who secures $16,000 in cash with their brokerage firm can make an immediate income of $430 shorting these puts. That works out to a yield of 2.6875% for just 3 weeks until expiration.

TSLA puts expiring May 3 - Barchart - As of April 9, 2024

Moreover, the $155 strike price put has a bid price of $3.10. That provides an immediate yield of 2.0%, even though the strike price is over 13.5% below today's price. In fact, the $150 strike price has a put yield of 1.49% (i.e., $2.24/$150) even though the strike price is over 15% from today's price.

This shows that there are good opportunities for existing shareholders to make extra money in TSLA stock at deep out-of-the-money prices. These strike prices are well near the recent lows in TSLA stock.

The bottom line is that TSLA stock's downturn may have been overdone, especially given how much FCF it is forecast to generate this year. Investors can take advantage of the high put premiums by short-selling them for extra income and the possibility of buying in at a lower price should TSLA stock fall again.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.