Tesla, Inc. TSLA shares have been locked in a lackluster phase since the post-earnings pullback seen in late July. Future Fund Managing Partner Gary Black detailed what the Elon Musk-led company should be doing to prop up the sagging stock.
What Happened: Even after Tesla funds investments in full-self driving, new Gigafactories, bots or any other capital expenditures, the company is left with a huge free cash flow, Black said in an X post on Friday. The fund manager noted that the company said in its recent 10-K filing that it expects capex to be $7 billion to $9 billion per year in 2023-24, while he estimates a free cash flow of $53 billion over the next five years.
If Tesla were to find more internal growth projects, then there wouldn’t be debate about the company initiating a stock buyback versus investing in those projects, Black said. There would be no excess cash left over for buybacks in that case, he added.
“The ‘problem’ (a good problem to be clear!) is TSLA keeps building cash,” Black said.
Tagging Musk, Black said, “This is my last attempt to explain the case for TSLA buybacks.”
Doing the math, the fund manager said a $10 billion buyback over three years would offer a 38% return of the future free cash flow to shareholders without touching the existing $22 billion cash on the balance sheet.
The benefit accrues five-seven years out when Tesla’s P/E implodes, he added.
See Also: Everything You Need To Know About Tesla Stock
Why It’s Important: Black’s comments come at a time as the company grapples with both macroeconomic uncertainties and industry-specific issues. The global economies have been pressured by a higher rate environment following monetary policy tightening by central banks to rein in inflation. This has put consumers on the defensive, making them cautious about spending on items such as cars.
With volume growth hard to come by, Tesla has fallen back on price cuts and discounts to perk up sales. This has consequently weighed on margins. That said, Tesla has several positive near-term catalysts, including the sales of the new Model 3 refresh and the commercial launch of the Cybertruck, which could help jumpstart volume and, in turn, the sagging stock.
A buyback is part of a company’s shareholder return policy and could have a psychological impact on stock prices. Technically, a stock buyback would reduce the number of outstanding shares and, in turn, increase the earnings per share.
Tesla is scheduled to release its quarterly results Wednesday after the market closes. Analysts worry about a further margin erosion, given Tesla persisted with downward price adjustments and its third-quarter sales trailed expectations.
Tesla closed Friday’s session down 2.99% at $251.12, according to Benzinga Pro data.
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