Capital markets are running out of patience with Tesla Motors.
Tesla Motors is facing a classic "sweet sorrow" scenario. While sales and revenue hit record highs, both profitability and gross margins are declining, placing the company in an awkward period of rising revenue without corresponding profit growth. After the earnings release, one frustrated shareholder remarked, "If the stock doesn't drop 10% today, it's a betrayal of expectations."
However, the market only partially fulfilled this sentiment. The stock fell, but not by 10%. Following the record revenue report, Tesla Motors shares dropped 4% in after-hours trading. The reason is clear: the pace of profit decline in the automotive business has outstripped the growth in AI-related revenue.
Two Significant Drops
Wall Street expressed dissatisfaction with Tesla Motors' financial results for the second quarter of 2026. The report appears contradictory, featuring both rising and falling figures. Financial performance showed quarterly revenue of $28.236 billion, surpassing the market expectation of $25.71 billion and increasing 26% year-over-year. Automotive revenue reached $20.516 billion, up 23% from the prior year.
These figures might typically warrant congratulations, as revenue exceeded market forecasts. Yet, CEO Elon Musk had little reason to smile, as profitability metrics weakened significantly. Operating profit plummeted 57% year-over-year, with an operating margin of just 1.4%. Furthermore, the automotive gross margin fell sharply from 21.1% in the first quarter to 16.8% in the second quarter.
These two substantial drops are difficult for the capital market to overlook. Wall Street delivered a vote of no confidence in this growth-without-profit model, driving the stock price lower in after-hours trading.
Tesla Motors attributed the decline in profitability and gross margin to several factors: lower average vehicle selling prices, reduced regulatory credit revenue, increased warranty costs for the energy business, and rising expenditures on AI research, stock-based compensation, and general operations.
To reassure investors, Tesla Motors noted that support for profitability is expected to come from higher vehicle deliveries, improved service business earnings, growth in FSD subscription revenue, and lower per-unit manufacturing costs.
The automotive business remains Tesla Motors' core, contributing 72.7% of total revenue. In terms of deliveries, the company produced over 451,000 electric vehicles globally in the second quarter, a year-over-year increase of about 10%, and delivered 480,100 units, up roughly 25%. The Model Y continues to lead global sales across all vehicle categories, indicating a broad recovery in global market demand.
During the earnings call, Musk remarked, "Many people come to the store wanting to buy FSD, and they get a car along with it." Data shows the FSD take rate for new vehicles in North America is 55%, with 1.48 million global paid subscribers, a 56% increase year-over-year. Based on 1.48 million users paying $99 per month for FSD capability, Tesla Motors generates approximately $775 million annually, making it the company's second-largest revenue source.
The Root of the Gross Margin Problem
Despite a decent growth rate and an outwardly positive picture, the question remains: where does the problem with automotive gross margin lie?
The direct cause is the reduction in vehicle selling prices and a significant decrease in carbon credit revenue. Carbon credit revenue fell 66.7% year-over-year, sharply reducing its positive impact on the automotive margin. Excluding credits, the automotive gross margin dropped to 16.3%.
Another core reason is the company's increased investment in artificial intelligence and autonomous driving research and development. Combined with higher stock-based compensation costs, operating expenses surged 47% year-over-year. Currently, the reported net profit includes $1 billion in unrealized gains from SpaceX equity. Excluding this non-recurring item, the net profit from core operations—automotive, energy storage, and services—is only around $100 million.
Management stated that Tesla Motors is in a period of large-scale investment, willing to sacrifice short-term profits for long-term technological and production capacity expansion. However, this assurance from Musk will require a long digestion period for investors.
A Vision for Wall Street
Wall Street's hesitation to fully embrace this reassurance is also due to Musk's clear statement that Tesla Motors will continue to burn cash until 2029. The market currently categorizes Tesla Motors as a "automotive + AI + energy storage + robotics" technology company, and the company has made a "comprehensive but aggressive" layout to support this positioning.
During the earnings call, Musk announced that plans for the Cybercab production line, the Optimus production line, the Dojo supercomputing cluster, next-generation AI hardware development, and the site selection for the TeraFab chip manufacturing facility would be revealed soon. He described this as "the fastest industrial expansion in the United States since World War II."
These initiatives are why the capital market is willing to pay a trillion-dollar valuation premium for Tesla Motors. However, this does not mean the market offers unlimited support. While it supports the long-term narrative, it also demands periodic performance. Capital investment requires a clear, achievable return expectation. Both elements are essential. Currently, all new business ventures are in a pure investment, zero-return incubation phase. Tesla Motors lacks adequate return expectations, and its periodic performance has been disappointing.
As a result, the capital market's confidence in Tesla Motors' multi-line investment expansion is insufficient, and even doubt has emerged. The company is currently in a phase where it is "not clear where the money is being spent." Capital expenditure for Tesla Motors is projected to exceed $25 billion in 2026, compared to $8.53 billion in 2025.
Despite these massive investments, production issues continue to plague the Optimus project. Musk has identified Optimus as "the hardest product to mass-produce in the company's history," with over 10,000 new custom parts per unit. This means Tesla Motors must not only develop new components, systems, and assembly processes but also redesign, verify, and build a new supply chain. This is a lengthy process. The Fremont factory has initiated production line construction, replacing the former Model S/X lines. The forecast is for monthly production of 100,000 units in five years, but there are no clear guidelines on scale, application scenarios, profit models, or return timelines.
Despite these challenges, Musk confidently painted a compelling picture for investors, stating, "Optimus will be the first robot capable of performing general tasks."
Before that vision materializes, investors want to see progress on the TeraFab super wafer factory. This is the core infrastructure for mass-producing AI chips and robots. In the short term, it consumes cash flow, with commercial profitability a distant prospect. Furthermore, Tesla Motors' plans for Cybercab mass production and the Robotaxi business remain in the technical pilot phase, also requiring a lengthy development period.
In its earnings report, Tesla Motors updated its annual production capacity forecast for the Cybercab at its Texas factory to 125,000 units. However, when questioned about challenges, Musk mentioned the demanding requirement of achieving "basically 99.999999999%% stability," which temporarily creates obstacles for Cybercab adoption. He vaguely stated, "Production ramp-up is progressing." It is clear that mass production scaling is a problem Tesla Motors cannot solve in the short term.
All these projects require significant funding. The three core technology tracks—FSD, Robotaxi, and Optimus—that underpin Tesla Motors' trillion-dollar valuation all face the problem of rapid technological advancement but slow commercial monetization. The CFO of Tesla Motors has clearly predicted that free cash flow will remain negative until 2029, with continuous cash consumption over the next three years.
Tesla Motors' trajectory is clear. The automotive business provides scale, data, and cash. This cash is then reinvested into Robotaxi, chips, and robotics. The ultimate goal is for software subscriptions, autonomous mobility services, and robot sales to form new profit sources. In Morgan Stanley's $417 price target, the automotive business accounts for only $47, with the remaining $370 attributed to Robotaxi, Optimus, and FSD.
However, the pressure of multiple business ventures and market scrutiny acts like a slow grind. Whether Tesla Motors can sustain its long-term R&D costs and investment expansion pace with the profits from its automotive business is something even Musk may not be able to guarantee. After all, market patience is beginning to wane.
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