Tesla Q2 Earnings Miss Expectations, Free Cash Flow Turns Negative, Stock Drops 4%

Tesla (TSLA-US) released its fiscal 2026 second-quarter earnings after market close on Wednesday (22nd). Despite revenue surpassing analyst expectations, profits were significantly below forecasts, leading to continued declines in after-hours trading. At the time of writing, shares were down over 4%.

The earnings release comes amid a sharp decline in Tesla's stock price. So far this month, the stock has fallen approximately 11%, and year-to-date, it has declined about 17%.

This downturn is mirrored by SpaceX (SPCX-US), another company led by Elon Musk that once surpassed a $1 trillion market valuation. SpaceX, after reaching a record high in June, has since seen its market value evaporate by over 40% from its peak closing price.

Q2 Earnings Key Figures vs. LSEG Estimates

Revenue: $28.24 billion vs. $25.71 billion

Adjusted EPS: $0.33 vs. $0.51

In its statement, Tesla said second-quarter revenue grew 26% year-over-year from $22.5 billion to $28.24 billion. However, net profit declined 5% annually, falling from $1.17 billion, or $0.33 per share, to $1.11 billion, or $0.32 per share.

Growth in Vehicle, Energy, and Service Businesses, but Margins Below Expectations

Tesla's core electric vehicle business generated $20.52 billion in revenue, a 23% increase from the same period last year. The energy business (including solar and battery storage systems) saw revenue grow 13% to $3.14 billion.

Service and other business (including out-of-warranty repair revenue) surged 50%, reaching $4.58 billion.

Although EV business revenue exceeded market expectations, Tesla's gross margin declined and fell short of forecasts due to lower average selling prices per vehicle and reduced regulatory credit income. Gross margin dropped from 17.2% a year earlier to 16.8%. According to StreetAccount, the market had expected a gross margin of 19.4%.

During the second quarter, Tesla introduced lower-priced versions of the Model 3 and Model Y while discontinuing the higher-priced flagship models, Model S and Model X.

Shifting Focus to Robotaxi and Optimus

Operating expenses grew at a much faster pace than revenue, as the company continues investing heavily in artificial intelligence (AI) and other R&D initiatives. Second-quarter operating expenses rose 47% year-over-year to $4.35 billion. Operating margin dropped sharply from 4.1% a year earlier to 1.4%.

CEO Elon Musk has been gradually shifting Tesla's focus from electric vehicle sales to autonomous ride-hailing (Robotaxi) services, mass production of driverless Cybercabs, and retrofitting its Fremont, California factory to begin manufacturing the Optimus humanoid robot.

Musk has promised shareholders that AI-powered robots will one day serve as babysitters, factory workers, or even world-class surgeons.

In its earnings presentation, the company stated it is currently installing the first-generation Optimus production line and will "soon begin production." It also noted that the first batch of Optimus robots will be used for "collecting training data and continuous feature development" and will not yet be provided to customers.

Tesla's free cash flow turned negative in the second quarter, with an outflow of $1.1 billion. In the same quarter last year, free cash flow was $146 million, and in the first quarter of 2026, it reached $1.44 billion.

In its shareholder letter, Tesla stated, "We will continue to manage our business prudently to maintain a strong balance sheet and ample liquidity to support our product development roadmap, long-term capacity expansion plans—including further vertical integration—and other operating expenses."

Meanwhile, capital expenditures surged 142% year-over-year, increasing from $2.39 billion to $5.79 billion. CFO Vaibhav Taneja previously indicated in the April earnings call that full-year capital expenditures for 2026 would exceed $25 billion.

Tesla said it is continuing capacity setup and expansion efforts related to long-term infrastructure projects, including AI computing infrastructure, solar energy, battery materials, and semiconductor manufacturing.

Tesla is striving to overcome years of declining vehicle delivery volumes. The main reason is intense competition from Chinese automakers, which are introducing more affordable electric vehicles in markets outside the U.S. Some consumers have also boycotted Tesla due to dissatisfaction with Musk's controversial political statements.

However, rising oil prices driven by tensions between the U.S. and Iran have significantly increased gasoline prices in the first half of this year, boosting Tesla sales, particularly as European consumers show higher willingness to purchase electric vehicles.

Tesla reported that effective subscriptions for its FSD (Full Self-Driving) system increased 56% year-over-year in the second quarter. Currently, 1.48 million subscribers are using this advanced driver assistance system.