[8/29 Editor's note: The author has revised several sections of this article post-publication.]
Tesla Motors (NASDAQ:TSLA) has rallied by more than 377.89% in last six months with charts showing that the stock is overbought in short term and it is due for a minor correction before moving up again. The vaunted electric carmaker's shares were selling for $164.15 a piece on Aug. 26, 2013.
The latest figures show that Tesla reported a cash flow of -$78.71 million on June 30, 2013. Elon Musk's car company is losing money even as its share prices have hit an astronomical high.
Cash Flow Shows Tesla Not Panning Out
The free cash figure proves that despite the hype, Tesla is far from making money. Even though the carmaker might know how to make safe vehicles, it doesn't know how to make money from them.
Tesla fans like to say that the company is bucking auto industry trends. Well, it's certainly bucking auto industry trends in terms of free cash flow. The three biggest U.S. carmakers, Ford Motor Company (NYSE:F), General Motors (NYSE:GM) and Toyota Motor Company (NYSE:TM), all reported quite a bit of free cash flow.
For the record, on June 30, 2013, Ford reported $4.48 billion in free cash flow, Toyota reported $3.92 billion, and bailout recipient General Motors reported $2.35 billion. The publicly traded car manufacturers are all doing well in this category, except for Honda Motor Company (NYSE:HMC), which reported a negative cash flow of $1.807 billion.
Disconnect with Reality
The free cash flow figures display a disconnect between the reality of what Tesla is - a technology company with a potentially disruptive new product - and its potential.
Tesla has reported some good sales in California, where it outsold Porsche, Volvo, Jaguar, Land Rover, Lincoln, Fiat, Buick, and Mitsubishi in the first half of this year. That sounds impressive, until you realize that Tesla has only sold 4,714 cars in a state with a population of 38.04 million people.
Tesla is going to have to demonstrate a far higher market penetration to justify those high stock prices. Its sales don't even come close to the two best-selling auto brands in California, Toyota, which has sold 157,035 cars in the Golden State so far in 2013, and Honda, which has sold 100,416.
High Expenses for Tesla Coming Soon
Toyota and Honda, of course, sell a wide variety of models. Tesla has just two models, the S series Sedan and the Roadster sports car. To produce the kind of sales that would actually rival the likes of Toyota, Tesla will need to offer a comparable variety of cars.
If Tesla wants to manufacture the variety of models offered by a Toyota, it will need to greatly expand its production capabilities. Currently, Tesla has just one factory in Fremont, Calif., and the capability to produce one model, the S Series, in house. The Roadster isn't even built at the Fremont plant, it's built in England by Lotus.
That means Tesla will have to spend a lot of money expanding its manufacturing capabilities before it can truly challenge Ford, GM, and Toyota. That also means it will be years before we'll see anything like an impressive free cash flow out of Tesla.
There is simply no way Tesla could become a major car manufacturer and make money in the foreseeable future, even with the $20 billion market capitalization it currently enjoys.
Sell Tesla Now
I would prefer to stay away from Tesla based on current levels in short term where in the stock is overbought. However I would buy the stock on all dips with stoploss as there is a lot of potential and the company is expected to do well in long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.