Over the previous yr, and on the day after Tesla unveiled its newest quarterly report, this author has calculated a metric referred to as 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 buyers’ wager that Musk will ship super-big on sundry promised improvements, from robotaxis to humanoid robots—areas the place moneymaking 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, Oct. 22. The corporate reported document gross sales for the quarter. However its horrible revenue numbers stand in obvious distinction to the latest moonshot for the inventory, which has doubled the producer’s market cap since early April, to $1.46 trillion earlier this week. The mixture of a ballooning valuation and big 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 Road.
Tesla’s core earnings are working at about half GM’s
To reach on the Magic Premium, I first deploy a formulation establishing bedrock, repeatable earnings. To get there I begin with GAAP internet income and modify for 2 gadgets.
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 massive penalties to Tesla and different EV-makers for failure to satisfy required targets for producing sufficient inexperienced automobiles themselves. Musk has acknowledged that the earnings stream from these funds will maintain falling, then just about disappear. Second: Tesla books positive factors or losses on its massive Bitcoin holdings every quarter. That’s a particular, nonoperating merchandise that I additionally exclude by eliminating the positive factors from income (or tacking again the losses).
For Q3, Tesla recorded internet earnings 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 income of $1.134 billion ($1.372 billion minus a $238 million internet discount from these noncore gadgets).
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” right now, based mostly on the cash it’s really making (versus the wonders its CEO retains promising)? If we award a worth/earnings ratio (P/E) of 30, equal to the S&P 500 common—which is very inflated, by the best way, by the share costs of the Magnificent Seven, together with Tesla—we get “truthful worth” of $108 billion (the 30 a number of instances $3.6 billion in earnings). However buyers 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 come back, quantities to the Musk Magic Premium: on this case, $1.35 trillion. Put one other method: 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 broaden to develop into the Musk Magic Premium?
At $1.46 trillion, Tesla is promoting at 405 instances repeatable earnings. Now let’s look at 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 want to double to $2.9 trillion.
Producing sufficient income to justify that enormous market cap would require Musk to set a journey of fast-expanding profitability and breakneck development, and buyers 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 P/E of 30. In that state of affairs, by then the corporate would want to supply $97 billion a yr in earnings. That’s roughly what each Microsoft and Apple register right now, and their present income tower among the many largest within the annals of capitalism.
Zooming from right now’s $3.6 billion run charge to $97 billion means Musk would want to develop income by 60% a yr, yearly, by means of 2032. Within the last 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.
