Tesla Motors In Rally Mode as EV Buzz Grows

Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After sluggish spring and summer months for Tesla Motors (NASDAQ: TSLA), the Fall has been friendly for shareholders as the stock is now up 18% over the past two months. The market sentiment has clearly turned positive on Tesla and a closer look under the hood reveals that this rally may continue for quite some time.

Tesla made quite some progress in Q3 that has investors excited. Despite the earnings miss, the company posted a strong Q3 revenue figure that sent the shares up 9%. Although the Q3 revenue figure is nothing to sneeze at, a deeper look into the earnings release provides additional optimism. In the guidance section of the release, the company said that “towards the end of the quarter, we expect to achieve positive free cash flow (cash flow from operations, inclusive of capital expenditures) in spite of short term cost inefficiencies.” In other words, Tesla will finally begin to throw off cash and create a positive ROI for the company’s shareholders.

The big driver behind the move towards positive free cash flow is the production ramp up. During Q3, Tesla successfully transitioned to a mass production car company, growing from manufacturing 5 cars per week at the beginning of the quarter to 100 cars per week by the end. That rate has doubled since last month and is now at over 200 cars per week or 10,000 cars per year, which is at the critical threshold needed for Tesla to generate positive operating cash flow. One month from now, Tesla is expected to double production again and achieve the target rate of 400 cars per week or 20,000 per year. There are also reports out there that the company may increase the price of the Model S for new reservations, which suggests that demand is picking up.

Not to be left out, other car manufacturers have been jumping in the electric vehicle (EV) fray. An electric vehicle startup agreed to open a Chicago factory. General Motors (NYSE: GM) announced it will accelerate development of electric cars in China as it seeks to position itself in that important future market. Fiat unveiled its first all-electric vehicle. At the LA Auto Show, which began on Wednesday, GM unveiled the Spark EV to some positive reviews.

For those unfamiliar, electric vehicles run on lithium ion batteries, which provide all of the power to the vehicle. As demand for electric vehicles increases, so will the demand for the batteries, and in turn the battery’s components. The name lithium ion battery is a bit of a misnomer as there is actually 20 times more graphite than lithium in the battery. The reason behind graphite’s popularity in lithium ion batteries is the fact that it is the anode of choice for most battery designs. In turn, graphite, along with Tesla, stand to significantly benefit as the market for electric vehicles grows and matures.

One company that is involved in graphite is USA Graphite. The company owns a graphite property in Nevada, which has been a hotbed for minerals and mining ever since it became a state in 1864. A number of major mining companies, such as Newmont Mining (NYSE: NEM) and Barrick Gold (NYSE: ABX), operate in the state. USA Graphite believes that the size of its property and the quality of the graphite on the property suggests that it could host a multi-million ton graphite mine.

Back to Tesla, the company has a CEO that is proven. The company’s CEO is billionaire Elon Musk, who has had some success in building and selling companies. He cofounded PayPal and sold a company called Zip2 to Compaq for $307 million. He also cofounded SolarCity, which is planning to stage its initial public offering shortly in hopes of raising as much as $151 million.

In conclusion, the industry drivers are definitely in Tesla’s favor as the world continues to move towards green energy and electric vehicles stand to benefit. That, in addition to the company’s quickly improving infrastructure and capable management team, suggests that Tesla should continue to be a winner.

Fool blogger Josh Hutcherson does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Tesla Motors. Motley Fool newsletter services recommend General Motors Company and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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