Why Tesla stock just crashed

Tesla stock looks like the "Bad News Bears" of the auto industry.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Tesla (NASDAQ: TSLA) stock fell 11% through 11:45 a.m. ET Wednesday after the company badly missed analyst forecasts for earnings Tuesday night.

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. But this sales growth came at a cost to profit: Earnings were only $0.52 per share.

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Tesla 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%.

What it means for investors

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.

So what does this mean 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.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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