Tesla (NASDAQ:TSLA) reported second-quarter results after the bell on Wednesday that showed a notable divergence: adjusted profit fell short of expectations, while cash flow performance exceeded analyst forecasts. The electric vehicle maker's stock declined 2.6% in early after-hours trading.
Adjusted earnings came in at $0.33 per share, falling 40% short of Tesla's own consensus estimate of $0.55. This earnings miss came despite record vehicle deliveries for the quarter. Revenue climbed 26% year-over-year to $28.24 billion, beating the consensus by 2.4%. However, operating income plummeted 57% to $398 million, driving the operating margin down to just 1.4%.
On the cash front, non-GAAP free cash flow registered a negative $1.09 billion, which was significantly better than the anticipated outflow of $3.25 billion. The cash burn was 66% below projections. The improvement was driven by operating cash flow of $4.70 billion, which surpassed expectations by $1.25 billion, and capital expenditures of $5.79 billion, which came in $909 million under the consensus estimate. Working capital also provided a boost, with inventory freeing up $592 million after a use of $2.26 billion in the prior quarter, and payables and other liabilities contributing an additional $1.94 billion.
Despite the cash flow beat, the composition suggests the surprise may be difficult to replicate. The improvement was not driven by higher operating profit. Gross margin stood at 16.8%, falling 2.7 percentage points short of the consensus. Automotive margin, excluding regulatory credits, declined to 16.3% from 19.2% in the first quarter. Tesla attributed the margin pressure to reduced vehicle prices, declining regulatory credit revenue, and increased expenses for AI research. Credit sales fell sharply to $146 million, down from $380 million in the first quarter.
Deliveries totaled 480,126 vehicles, a 25% increase year-over-year, and outpaced production by 28,368 units. Inventory days dropped to 15, compared to 27 in the previous quarter. The company ended June with $43.52 billion in cash and short-term investments, exceeding the consensus by $2.53 billion but down $1.22 billion from the March total.
The earnings shortfall is particularly significant as Tesla is in a period of heavy investment. According to a sell-side survey, projected capital expenditures stand at $25.3 billion, with an anticipated full-year free cash flow shortfall of $9.85 billion. Prior to the report, Andrew Percoco, an analyst at Morgan Stanley (NYSE:MS), noted that investors are increasingly focused on evidence that Tesla's spending is strengthening its physical AI moat.
The stock had declined 5.2% from its July 15 closing price through Wednesday's regular session, which ended at $374.13, down 1.3%. After-hours trading saw the stock drop to $364.29 as of 4:15 p.m. EDT. Tesla's earnings call is scheduled for 5:30 p.m., where market participants will look for details on spending levels and margin pressure. The full market response will come in Thursday's session.
Risks remain. Further drops in vehicle pricing or a quicker increase in AI expenditure could accelerate cash burn. The working-capital boost may not recur. While cash performed more strongly than anticipated, the margin miss continued to weigh on sentiment in after-hours trading.
