Tesla’s stock plummeted over 18% this week following a disappointing second-quarter earnings report, marked by an earnings miss, negative free cash flow, and narrowing gross margins. Wall Street analysts are urging caution, citing delays in key projects like Optimus and Full Self-Driving (FSD) and questioning the monetization of significant technology investments.
Despite some long-term bullish views on its AI transition and potential SpaceX merger, the current reality of stagnant margins and increased capital spending is making the investment case harder to justify for many experts.
Tesla investors have experienced a challenging period, with the company delivering a negative return over the past four years. The latest blow came after Elon Musk's electric vehicle giant reported its second-quarter earnings post-market on Wednesday, leading to a significant stock decline. Shares plummeted 15% on Thursday and an additional 3% on Friday, marking an over 18% drop for the week and pushing the stock to levels not seen in over a year and last touched more than four years ago. This recent downturn has prompted Wall Street analysts to urge caution, questioning whether this presents a 'buy the dip' opportunity.
Analyst Colin Rusch from Oppenheimer, who holds a neutral rating on Tesla, highlighted concerns on CNBC's "Squawk Box." Rusch noted, "We think they've made some pretty substantial technology investments over the last five or six years around chips and other elements that are going into this shift into physical AI, but the results just aren't there." He specifically pointed to delays in key projects such as Optimus, Tesla's humanoid robot, and its Full Self-Driving (FSD) technology. Investors, he suggests, are primarily looking for clearer monetization strategies for these advanced technologies.
According to FactSet data, a majority of Wall Street analysts have refrained from labeling Tesla as a 'buy' since the first quarter of 2023, even when the stock was down roughly 70% from its 2021 peak. The recent second-quarter results, while reporting a revenue beat, ultimately delivered an earnings miss, with free cash flow turning negative and gross margins narrowing. Consequently, no investment banks upgraded or downgraded Tesla, though several analysts lowered their share price targets.
Adding to the cautious outlook is Tesla's commitment to substantial capital spending as it aims to diversify beyond electric vehicles into artificial intelligence. Truist Securities analyst William Stein, who maintained a hold rating but lowered his price target by 14% to $370 from $430, explained the situation. "Last qtr TSLA's transition from autos to AI became obvious. This qtr, we're starting to see the expenses... and it may dent profitability for longer than we anticipated," Stein wrote in a note. He believes these investments are crucial for Tesla's AI transition but will inevitably impact margins and cash flow for an extended period.
Even bullish analysts like Canaccord Genuity's George Gianarikas, who rates Tesla a buy, acknowledged the increasing difficulty in making a strong case for the stock. Gianarikas described the theoretical Tesla thesis as "intoxicating," citing iconic products, a influential founder, and hints of a potential blockbuster SpaceX merger. However, he admitted, "Yet the reality in the ledgers is uncompromising. It is currently a story of stagnant margins, negative free cash flow impacted by long-term investments, and breakthrough promises anchored to timelines hard to measure and model."
Despite the current financial headwinds, some long-term believers remain. Speculation around a potential Tesla merger with SpaceX continues to be viewed as a future tailwind, though its immediate impact on financials is unclear. Cathy Wood's Ark Investment Management, for instance, took advantage of the latest stock slide by adding Tesla shares to several of its ETF funds. Piper Sandler analyst Alexander Potter also reiterated an overweight rating and a $500 price target, suggesting the recent share price weakness was anticipated. Potter highlighted positive trends such as rising FSD subscriptions and record service margins, expressing belief that Tesla can regain investor favor, contingent on disproving doubts regarding Optimus and Cybercab catalyst timing.
