Does Tesla have a “free cash flow” problem? What that would mean for the stock.

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Covid-19 lockdowns in China have hurt Tesla production.

John MacDougall/AFP via Getty Images

That Tesla is pumping out more cash than it is using this quarter is the final wild card in what is proving to be a bumpy stretch for the title.

Much turbulence is already reflected in Tesla’s share price (ticker: TSLA). As of Monday’s open session, the stock was down 35% in the second quarter, while the


Nasdaq Compound

had fallen by about 16%.

A few factors are responsible for the underperformance. There are growing concerns about the state of the global economy, with inflation prompting central banks to raise interest rates, hurting demand for new cars and reducing the present present value of earnings that are expected to rise in the coming months. years to come. And Elon Musk’s offer for

Twitter

(TWTR) probably didn’t help Tesla shareholders either, although the outlook for that deal appeared to change early Monday.

The effect of Covid-19 on second-quarter production at Tesla’s Shanghai factory is the most tangible issue. The factory was closed at the end of March, reopened at reduced capacity in mid-April and still does not produce as many cars as before. In April, Tesla delivered just 1,512 vehicles from the factory, according to industry data. That’s down from nearly 66,000 vehicles delivered in March.

The slowdown will obviously affect Tesla’s reported numbers in several ways, including cash flow. “Will Tesla burn money in the second quarter,” is a question New Street Research analyst Pierre Ferragu posed in a Monday report.

Lower sales volumes will reduce the amount of cash inflow, but working capital is also a headwind. “Collection of debts relating to [costs] from the previous quarter” is an indirect impact that Ferragu sees.

If Tesla is found to be burning cash, it could be a shocking change for investors. The company has generated positive free cash flow for eight consecutive quarters, and 11 of the last 12.

The consensus on Wall Street is that Tesla will produce free cash flow of $1.3 billion for the second quarter, compared to about $2.2 billion in the first. That’s probably too optimistic, though, because analysts can’t always track quarters marked by business volatility.

Wall Street analysts, for example, still forecast 303,000 deliveries for the second quarter, according to Bloomberg. But there are still estimates as high as 344,000 units within that average. The higher estimates seem outdated. The latest figures imply deliveries of 240,000 to 270,000 units.

Ferragu, for its part, expects 251,000 deliveries, compared to around 310,000 in the first quarter. The second quarter will end a streak of eight consecutive quarters of record shipments.

Ferragu also thinks Tesla will likely only break even in terms of free cash flow, a much more pessimistic view than the consensus figure of $1.3 billion. Still, it remains a bull on Tesla stock, rating it Buy, with a price target of $1,580.

Overall, about 50% of analysts covering Tesla stocks are buying. The average buy odds ratio for stocks in the


S&P500

is about 58%.

Investors will get data on May deliveries from Tesla’s Chinese factory from industry association figures in about a week. This is followed by second quarter deliveries in early July, followed by second quarter results later in the month.

Anyway, Tesla stock had a pretty good Monday. The shares ended up 1.6% at $714.84. The


S&P500

and


Dow Jones Industrial Average

increased by approximately 0.3% and 0.1%, respectively.

A few things helped, including a letter from Elon Musk stating that Twitter’s communications with him regarding the amount of spam on the platform constituted a breach of contract. That cast new doubt on whether the potential sale would be realized, which put a damper on Tesla shares.

Additional news came from China. On Monday, Citigroup analyst Jeff Chung wrote that industry officials expect Chinese passenger vehicle sales to rebound in June from the Covid shutdowns.

NIO

(NIO) US Certificates of Deposit closed up 5.9%.

Musk also clarified his stance on employee headcount in a tweet on Saturday. Tesla shares fell more than 9% on Friday, in part due to confusion over Tesla’s hiring plans. Early reports said Musk was going to cut its workforce by 10%, which would be odd for a company growing as fast as Tesla. Musk’s tweet indicated that total employee headcount in 2022 will increase, while salaried staff levels will remain stable.

Write to Al Root at allen.root@dowjones.com