To arrive at the Magic Premium, I first deploy a formula establishing bedrock, repeatable earnings. To get there I start with GAAP net profits and adjust for two items.
The first: sales of regulatory credits. They’re already declining now that the Trump administration has waived a previous requirement that U.S. automakers pay what amount to big penalties to Tesla and other EV-makers for failure to meet required targets for producing enough green vehicles themselves. Musk has acknowledged that the income stream from those payments will keep falling, then pretty much disappear. Second: Tesla books gains or losses on its big Bitcoin holdings each quarter. That’s a special, nonoperating item that I also exclude by eliminating the gains from profits (or tacking back the losses).
For Q3, Tesla recorded net income of $1.372 billion. That represents a fall of 37% from the same three-month span last year. Subtracting the after-tax contribution from regulatory credits of roughly $300 million, and adding back a $62 million loss on digital holdings unrelated to how Tesla’s businesses are faring, I get sustainable net profits of $1.134 billion ($1.372 billion minus a $238 million net reduction from these noncore items).
So what’s Tesla “worth” today, based on the money it’s actually making (as opposed to the wonders its CEO keeps promising)? If we award a price/earnings ratio (P/E) of 30, equal to the S&P 500 average—which is highly inflated, by the way, by the share prices of the Magnificent Seven, including Tesla—we get “fair value” of $108 billion (the 30 multiple times $3.6 billion in earnings). But investors are wagering that the automaker is worth $1.46 trillion. The difference, the value that rests on Musk’s ever-shifting pledges on what’s to come, amounts to the Musk Magic Premium: in this case, $1.35 trillion. Put another way: The promise of gauzy visions that keep receding like a mirage in the desert accounts for 90% of Tesla’s market cap.
At $1.46 trillion, Tesla is selling at 405 times repeatable earnings. Now let’s examine the heights the stock must hit to notch even a modest, 10% annual return over the next seven years. To get there, Tesla’s valuation would need to double to $2.9 trillion.
Zooming from today’s $3.6 billion run rate to $97 billion means Musk would need to grow profits by 60% a year, every year, through 2032. In the final 12 months alone, he’d have to add tens of billions in extra earnings.
Of course, Musk has worked miracles in the past. But this Halloween, chasing away the ghouls haunting Tesla looks like a miracle too far.
