Tesla Motors is selling more vehicles but earning less profit. The company's revenue for the second quarter exceeded $28.2 billion, setting a new record, yet its operating profit fell by nearly sixty percent. Where has the money gone?
On July 23, Beijing time, Tesla released its financial results for the second quarter. Revenue reached a record high for the period and surpassed market expectations. However, profitability weakened, with adjusted earnings per share falling well short of Wall Street forecasts. Furthermore, free cash flow turned negative for the first time in over two years.
Specifically, in Q2, Tesla's total revenue was $28.236 billion, a 26% increase year-over-year. Automotive revenue reached $20.516 billion, up 23% from the previous year. This included $20.006 billion from vehicle sales, $364 million from automotive leasing, and $146 million from the sale of regulatory credits. Nevertheless, Tesla's adjusted earnings per share were $0.33, significantly below the market expectation of $0.51.
Tesla explained that the revenue growth in Q2 was primarily driven by an increase in vehicle deliveries, growth in Full Self-Driving (FSD) subscriptions, expansion of service and other businesses, growth in the energy business, and a favorable currency exchange impact of approximately $500 million.
Data shows that in the second quarter, Tesla produced 451,800 vehicles, a 10% year-over-year increase, and delivered 480,100 vehicles, a 25% rise, setting a new company record for the period.
Analyzing the Sales Mix
The Model 3 and Model Y remain Tesla's sales pillars. Combined production for these two models in Q2 was 442,900 units, with deliveries reaching 467,800, representing year-over-year increases of 12% and 25%, respectively. They contributed approximately 97.4% of total deliveries. Production of other models, including the Cybertruck, was 8,822 units, down 34% year-over-year, while deliveries reached 12,400, a 19% increase.
According to Tesla, it achieved record deliveries in several markets during Q2, including South Korea, Australia, Colombia, Japan, Thailand, Portugal, the Philippines, Chile, Slovenia, and Lithuania. In July, Tesla launched the Model Y L in the United States, receiving positive initial feedback.
Profitability Under Pressure
However, it is noteworthy that the growth in sales and revenue did not translate into improved profits. In Q2, Tesla's operating profit was only $398 million, a sharp decline of 57% year-over-year. The operating margin dropped from 4.1% in the same period last year to 1.4%. The automotive gross margin also decreased from 21.1% in the first quarter of this year to 16.9%.
Industry analysis suggests Tesla's profit decline is mainly due to a decrease in the average selling price of its vehicles. To stimulate demand, Tesla introduced multiple purchase incentives and discontinued the higher-priced Model S and Model X vehicles.
An analyst noted that while Tesla achieved its best-ever second-quarter sales volume, the market is more focused on profitability. The sales growth was largely driven by significant discounts, which clearly squeezed profit margins.
Significant Investments Impacting Cash Flow
Furthermore, Tesla's ongoing substantial investments in artificial intelligence (AI) also weighed on profits. In Q2, research and development expenses and capital expenditures increased significantly. Capital expenditures surged 142% year-over-year to $5.789 billion. This massive investment directly led to free cash flow turning negative for the first time in two years, with an outflow of approximately $1.09 billion.
Tesla's Chief Financial Officer indicated that the company's capital expenditures are expected to exceed $25 billion by 2026 and will continue to grow over the next two to three years.
Tesla's CEO stated that the company should advance its investments "as fast as possible" without waste to support long-term strategic areas like autonomous driving, AI, and robotics.
Emerging Growth Areas
While short-term profits are under pressure, FSD subscriptions and the Robotaxi initiative are gradually becoming new growth drivers beyond Tesla's core automotive business.
By the end of Q2, the number of Tesla FSD paying users reached 1.48 million, a 56% increase from 950,000 a year earlier and an addition of 200,000 from the end of the first quarter. Tesla's CEO believes demand will further increase as FSD gains regulatory approvals in various countries.
Additionally, Tesla has begun rolling out FSD V14 lite to vehicles equipped with the AI3 (HW3) hardware, distilling driving behaviors from the V14 series on newer hardware to the previous generation platform.
Regarding Robotaxis, Tesla has expanded its service to multiple cities in the United States. Concurrently, production of the Cybercab has begun at the Texas Gigafactory, and it has entered the public road engineering testing phase.
Tesla anticipates that as manufacturing costs continue to decline and its AI, software, and Robotaxi fleet businesses gradually scale, future profit sources will increasingly shift from hardware sales to AI, software, and fleet operations.
Following the earnings release, Tesla's stock price declined. At the close of trading on July 22, Eastern Time, Tesla's share price fell by $4.92 to $374.01 per share, a drop of 1.30%. In after-hours trading, the stock price fell further.
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