Why the Tesla Stock Rally Is Fading Today

Tesla stock (TSLA) has been on a rollercoaster ride in recent months, with a stunning 102% rally in 2023 followed by a 20.4% decline in the first half of 2024. Investors have been grappling with the company's volatile stock performance, and today's market action is no exception. The stock has lost ground again, falling by 11% through 11:45 a.m. ET Wednesday after the company badly missed analyst forecasts for earnings Tuesday night.



The back story. Tesla's stock rally in 2023 was fueled by strong earnings and revenue growth, as well as optimism about the company's electric vehicle (EV) prospects. However, the stock's performance has been volatile, with several factors contributing to its recent decline.

What's new. Tesla reported earnings Tuesday night, and the results were not what investors were hoping for. Heading into the second-quarter report, Wall Street forecast the electric car leader would earn $0.62 per share on sales of $24.8 billion. Tesla exceeded the latter expectation, reporting Q2 sales of $25.5 billion. However, earnings were only $0.52 per share, falling short of analyst estimates.

Tesla's profits collapse. Not all Tesla's news was bad. Notably, the company's energy generation (i.e., solar panels) and storage (i.e., batteries) division -- which believe it or not is now more profitable (with an 18.9% gross profit margin) than the automotive business, doubled in size to $1.5 billion in sales. And free cash flow for the quarter increased nicely to $1.3 billion.

Automotive sales, however, fell 7% year over year. And total sales were up an anemic 2%, despite beating estimates. Particularly worrisome is the fact that operating expenses surged 39% in the quarter. Falling sales and rising costs is not usually a recipe for strong profits, and this proved true for Tesla, too. The company's operating profit margin shrank by more than a third, to 6.3%. Operating profits fell one-third to $1.6 billion. Net profits cratered -- down 45%.

Even then, the bad news wasn't done. Turns out, both analyst forecasts and Tesla's $0.52 headline result were put in the form of pro forma, non-GAAP profits. When calculated according to generally accepted accounting principles, Tesla's profit per share was only $0.42.

What it means for investors. At $700 billion in market capitalization and with $12.4 billion in trailing earnings, Tesla stock currently costs more than 56 times trailing earnings. That wouldn't necessarily be a bad thing if Tesla was still growing its sales by 50% or 70% annually, as happened during the pandemic. However, with Tesla stock stuck nearly in neutral at a 2% sales growth rate, and profit margins plummeting, it's hard to call Tesla stock a buy.

Looking Ahead. Tesla's stock performance remains volatile, and investors should wait for more clarity on the company's financial metrics before making a decision. The upcoming launch of Tesla's robotaxi could provide a catalyst for the stock, but investors should be cautious about the company's ability to execute on its ambitious plans. As always, it's essential to do thorough research and consider your risk tolerance before investing in any stock.