Tesla’s Margins Need A Recharge

Tesla’s vehicle business shifted into high gear during the second quarter, while profitability slipped into reverse. Revenue increased 26% from a year earlier to $28.24 billion, comfortably topping the roughly $26.4 billion analysts expected. Adjusted earnings nevertheless fell 18% to $0.33 per share, missing the approximately $0.53 consensus, while operating income tumbled 57% to $398 million, shrinking Tesla’s operating margin to 1.4% from 4.1%. GAAP net income attributable to common stockholders declined just 5% to $1.11 billion. That figure included a $1.01 billion pretax unrealized gain on Tesla’s SpaceX investment. Shares closed down 1.3% Wednesday at $374.01 and were indicated another 6.1% lower early Thursday at roughly $351.30, as investors looked past the revenue beat and examined how little of it reached the bottom line.

Vehicle deliveries climbed 25% to a second-quarter record of 480,126, while automotive revenue increased 23% to $20.52 billion. Tesla delivered about 28,000 more vehicles than it produced, reducing its inventory to 15 days of supply from 27 during the first quarter. Moving those vehicles required some financial horsepower, however. Lower average selling prices pulled automotive gross margin excluding regulatory credits down to approximately 16.3% from 19.2% sequentially. Regulatory-credit revenue also dropped to $146 million from $439 million a year earlier, removing a particularly profitable source of income. The vehicles left Tesla’s lots quickly, but the profits did not follow them out.

The company is simultaneously pouring money into businesses that it expects to matter more than conventional car sales. Research and development spending surged 49% to $2.37 billion, helping total operating expenses climb 47%. Tesla began producing Cybercabs, expanded its Robotaxi operation to seven major metropolitan areas and continued installing its first-generation Optimus production lines. Six of those Robotaxi markets are ramping unsupervised service, while Bay Area operations still use a safety driver. Active Full Self-Driving subscriptions reached 1.48 million, up 56%, providing some evidence that its software strategy is gaining traction. Energy-storage deployments also increased 41% to 13.5 gigawatt-hours, while services and other revenue jumped 50%. Those businesses are growing, but their payoff has not yet caught up with Tesla’s increasingly ambitious buildout.

Capital expenditures more than doubled to $5.79 billion, turning $4.70 billion of operating cash flow into negative free cash flow of $1.09 billion — Tesla’s first quarterly cash burn in more than two years. Its $43.52 billion in cash and investments provides plenty of room to keep building AI infrastructure, battery capacity, robot factories and semiconductor manufacturing. The harder question is how quickly those projects begin producing returns. Tesla demonstrated that it can still move an impressive number of vehicles, but until its AI investments start carrying more of the financial load, profitability could remain the roughest part of the road.

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