Tesla's Free Cash Flow Crisis: Why the Stock Could Plunge 60%

The narrative around Tesla (TSLA) has long been shaped by its vision of electric vehicles, autonomous driving, and a future dominated by renewable energy. Yet beneath the hype, a troubling reality is emerging: weakening free cash flow, plummeting deliveries, and margin pressures are painting a picture of a company struggling to sustain its growth. With Wells Fargo projecting a 20% year-over-year (YoY) drop in Q2 deliveries and regional markets collapsing—Europe down 42%, China 22%—the disconnect between Tesla's overvalued stock and its deteriorating fundamentals is unsustainable. This article argues that investors should brace for a near-term correction, with the stock potentially falling to $120, a 63% decline from current levels.

The Free Cash Flow Collapse

Tesla's Q1 2025 free cash flow (FCF) of $664 million marked a sharp 71% year-over-year decline from $2.28 billion in Q1 2024. While the figure improved sequentially from Q4 2023's negative $2.54 billion, it reflects a stark reversal of fortune. The FCF drop stems from multiple headwinds:
- Revenue stagnation: Q1 revenue fell 9% YoY to $21.38 billion, with automotive deliveries down 13% to 336,681 units.
- Margin erosion: Auto gross margins (excluding regulatory credits) dropped to 13.6%, driven by lower production volumes during Model Y retooling and rising incentives to clear inventory.
- Capital expenditures: Tesla's capex surged to $11 billion for 2025, fueled by AI infrastructure, factory upgrades, and the rollout of Optimus robots.

Wells Fargo analysts now project Tesla's FCF could turn negative for the first time since 2018, with a full-year burn of $1.9 billion. This deterioration is a stark rebuttal to the company's “cash machine” reputation.

Delivery Disasters and Regional Declines

Tesla's delivery data is flashing red. Wells Fargo's Q2 2025 projection—a 20% YoY decline—aligns with brutal regional collapses:
- Europe: Deliveries fell 42% YoY, with May's decline hitting 29% across 11 countries. France, Portugal, and Sweden saw drops exceeding 50%, underscoring weak demand amid high prices and cheaper alternatives.
- China: Competitors like BYD and Chery are undercutting Tesla with aggressive pricing, leading to a 22% YoY drop in deliveries. Tesla's Model 3/Model Y lineup struggles to compete on cost.
- North America: Deliveries fell 13% YoY, driven by waning EV demand and reputational damage from Elon Musk's political entanglements, including his role in the Department of Government Efficiency (DOGE).

The company's Q2 results are likely to disappoint further. To meet consensus estimates of 411,000 deliveries, Tesla would need a 50% month-over-month jump in June—an unlikely feat given current trends. Wells Fargo expects full-year deliveries to land at just 343,000 units, a 21% YoY drop and 17% below consensus.

Margin Pressures and the Pricing War

Tesla's margin challenges are self-inflicted. Aggressive financing promotions—effectively disguised price cuts—have failed to revive demand. Auto operating income dropped 23% YoY to $1.58 billion, while auto gross margins ex-credits hit their lowest level in years.

The company's reliance on regulatory credits (ZEV credits) is another vulnerability. These credits contributed ~50% of Tesla's regulatory earnings but are now declining in value, adding over 10% to EBIT risks. Meanwhile, U.S. Section 232 tariffs and China's trade policies threaten energy storage margins, which now account for 23% of Tesla's revenue.

Overvalued Narratives vs. Reality

Tesla's stock has fallen 16% year-to-date, but it remains overvalued relative to its fundamentals. The market is pricing in a $1 trillion autonomous driving future—hyped by Musk's Robotaxi and FSD ambitions—but execution risks are mounting. The Austin Robotaxi rollout, delayed to June 2025, faces regulatory hurdles and lacks a clear path to profitability. Similarly, Optimus robots, promised to “disrupt manufacturing,” are years away from commercialization.

Wells Fargo's $120 price target implies a 63% drop from current levels, reflecting its view of Tesla as a “value trap.” The stock trades at 172x consensus 2025 EPS and 400x Wells Fargo's own estimates, a valuation gap that can't be justified by fading FSD dreams.

Investment Thesis: Bearish on Tesla's Near-Term Outlook

The evidence is clear: Tesla's fundamentals are deteriorating across all key metrics. FCF is collapsing, deliveries are plunging, margins are under pressure, and competitive threats are surging. While Musk's vision remains bold, the execution timeline is unrealistic, and the stock's valuation ignores these realities.

Investors should heed Wells Fargo's warnings:
- Risks: Slowing EV demand, delayed product launches (affordable Model 2.5, Robotaxi), and Musk's distractions.
- Near-term catalysts: Q2 earnings (likely to miss), U.S. ZEV credit expiration, and Section 232 tariff impacts.

The $120 price target is achievable if these risks materialize. Until Tesla stabilizes deliveries, improves margins, or proves its autonomous vision, the stock remains a short opportunity.

In conclusion, Tesla's story is no longer about disruption—it's about survival. Until the fundamentals turn, investors should avoid this stock or prepare for a significant correction.