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Tesla Is Plunging, but It's Not Why You Think

Updated from 10:48 a.m. to include thoughts from Goldman Sachs analyst.

NEW YORK (TheStreet) Tesla Motors (TSLA - Get Report) may have posted first-quarter earnings that beat analyst forecasts and given investors an enticing update about its Gigafactory, but Wall Street has other issues on its mind: namely, that Tesla is going to be free-cash flow negative this year as the carmaker continues to spend money on capital expansion in order to grow for the long term.

When the company reported first-quarter earnings yesterday, Tesla CEO Elon Musk noted that the company is going to invest between $650 million and $850 million this year, as the company builds out its Gigafactory, as well as continuing to build out its service centers, Supercharger network and the continued design of the Model X, due out later this year.

"We still plan to invest $650-850 million for the year in capital expenditures for increased production capacity, growth in our store, service center and Supercharger footprints, Model X and S development and start of Gigafactory construction," Musk said in the shareholder letter. As a result, he expects Tesla to be cash flow negative for 2014, before "considering the equity required for leasing."

As a result, shares were down sharply in Thursday trading, off 10.3% to $180.70.

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For the first-quarter,Tesla earned 12 cents a share on a non-GAAP basis, generating $713 million in revenue, as it delivered 6,457 Model S units. The company produced 7,535 units for the quarter, but the rest of them are in transit to Europe and Asia, where Musk noted the company is seeing exceptional demand. "I really don't think we have any kind of demand challenge in China," Musk said on the conference call. "I was blown away by the level of interest and enthusiasm in China from people at all levels, people in government, industry and consumers. I'm really optimistic at how things will go there."

Karl Brauer, senior analyst for Kelley Blue Book, noted Tesla's story is more about where it can go in the future, as opposed to what it's doing now. "The fascinating thing about Tesla is how its earnings remain a small part of what drives interest in the automaker," Brauer said in emailed statements. "Its latest earnings report shows continued progress, and China could be a huge cash cow for the company if Tesla can fully leverage that market. But I think investors are waiting to see substantial progress on the Model X crossover and proposed battery factory."

Analysts surveyed by Thomson Reuters were expecting Tesla to earn 10 cents a share on $699.09 million in revenue.

Palo Alto, Calif.-based Tesla is still constrained by battery cell supply, and Musk noted that would continue to be the case for the second quarter, but improve in the third quarter thanks to a deal the company signed with Panasonic late last year.

Concerning the Gigafactory, Musk noted that Panasonic had signed a letter of intent with Tesla to be a partner for the massive factory, and that there's a joint working team between the two companies already working out some initial details. Musk said Tesla was "highly confident" of getting the 30% cost cut in kilowatt hours for the battery, in order to achieve the $30,000-$40,000 initial price point for the Gen III car.

Musk did go on to say that California, which was not part of the initial four states listed for the Gigafactory (Arizona, Nevada, New Mexico and Texas), was back in the running for the Gigafactory, but that it was improbable the state would get the plant, due to difficult rules and regulations surrounding building permits and greenfield sites. Musk also confirmed that Tesla was building two Gigafactories simultaneously in two different states to allow for any problems and regulations. CFO Deepak Ahuja noted it's really critical that the first Gigafactory is on time, stating that every one month delay is worse in cost than building two sites at one time.

For the second quarter, Tesla said it expects to deliver about 7,500 Model S units, as the company looks to surpass 35,000 Model S deliveries for the year. The car manufacturer is looking to produce between 8,500 and 9,000 cars for the quarter, up 13% to 19% sequentially.

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