Tesla’s weak earnings show how its signature “Musk Magic” is inflating its stock price

I calculated the scale again after that Tesla third quarter reportissued after the market close on Wednesday, October 22. The company announced record sales for this quarter. But its dire earnings numbers stand in stark contract with the stock’s recent surge, which has more than doubled the manufacturer’s market value since early April, to $1.46 trillion earlier this week. The combination of an inflated valuation and a significant decline in profits since the company’s heyday at the turn of the decade makes Magic Premium a Halloween ghoul haunting Wall Street.

Tesla’s core earnings are about half of GM’s

To get to Magic Premium, I first published a formula that determines basic repeatable profits. To get there, I start with GAAP net earnings and adjust two items.

First: selling regulatory credits. It has actually backed down now that the Trump administration has waived a previous requirement that US automakers pay up to hefty fines to Tesla and other electric car makers for failing to meet targets required to produce enough green vehicles themselves. Musk has acknowledged that the income stream from those payments will continue to decline, then largely disappear. Second: Tesla books gains or losses on its large Bitcoin holdings every quarter. This is a special non-operating item and I also exclude it by removing gains from earnings (or offsetting losses).

In the third quarter, Tesla reported net income of $1.372 billion. This represents a decline of 37% from the same three-month period last year. Subtracting the after-tax contribution from regulatory appropriations of about $300 million, and adding a loss of $62 million on digital properties unrelated to how Tesla does business, I get a sustainable net gain of $1.134 billion ($1.372 billion less a net reduction of $238 million from these non-core items).

Add that number to adjusted earnings for the past three quarters, and you get a total core reading of $3.6 billion over the past 12 months. This is about half of what is typical for metal bending GM It happened in the same period.

So what is Tesla worth today, based on the money it actually makes (as opposed to the wonders its CEO keeps promising)? If we give a P/E of 30, equivalent to the S&P 500 average – which is highly inflated, by the way, by the prices of Mag 7 stocks including Tesla – we get a “fair value” of $108 billion (30 times $3.6 billion in earnings). But investors are betting that the automaker is worth $1.46 Trillion. The difference, the value based on Musk’s ever-changing pledges about what’s to come, amounts to a Musk Magic Premium: in this case, $1.35 trillion. In other words: The promise of vague visions that keep receding like a mirage in the desert represents 90% of Tesla’s market cap.

How quickly must Tesla’s earnings expand to grow into Musk Magic Premium?

At $1.46 trillion, Tesla sells for 405 times recurring earnings. Now let’s examine the heights the stock must reach to achieve a modest 10% annual return over the next seven years. To achieve this, Tesla’s valuation would need to double to $2.9 trillion.

Producing enough profits to justify that giant market capitalization will require Musk to embark on a journey of rapidly expanding profitability and rapid growth, and on this journey investors will face a room of terror. We’ll be generous and imagine that by late 2032, Tesla will achieve the same rich P/E of 30. In this scenario, the company would by then need to produce $97 billion in earnings annually. That’s pretty much both Microsoft and apple Register today, and their current profits will be among the largest in the history of capitalism.

Going up from the current run rate of $3.6 billion to $97 billion means Musk would need to increase his profits by 60% a year, every year, through 2032. In the last 12 months alone, he would have to add tens of billions in additional profits.

Of course, Musk has done miracles in the past. But this Halloween, the ghouls chasing Tesla seem like a far-fetched miracle.