Ahead of Tesla's Q3 earnings, a closer look at Q2: revenue rose by a quarter year over year, while operating profit fell by more than half. More vehicle sales did not translate into higher earnings.
Ahead of Tesla's Q3 earnings, a closer look at Q2: revenue rose by a quarter year over year, while operating profit fell by more than half. More vehicle sales did not translate into higher earnings.
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The research comes from Milo Alpha, the investment research system from MILO Investments. Financial data is as of June 30, 2026. The company announced Q3 vehicle deliveries and energy storage deployments on October 2, 2026. The research reflects evidence available through October 19, 2026.
Research commentary only, not investment advice; the author may hold the stocks mentioned.
0:00In the second quarter, Tesla's revenue grew by a quarter year over year, but operating profit fell by more than half. It sold more cars, yet it didn't earn more.
0:13The company has announced that third-quarter results come out after the U.S. market close on October 21 Eastern Time, which is early on the 22nd in Beijing. Third-quarter deliveries were more than 480,000 vehicles, down more than 2% from a year earlier: part of the second quarter's strong growth came from a low base in the first half of last year, when the Model Y line was changed over. Deliveries and energy storage deployments were already published on October 2, so they won't be news on earnings night.
0:46The real question is how much of this business turns into profit and cash, and how much is left per share after ongoing investment and dilution.
0:56Where did the money go? Gross profit did rise, but R&D and selling and administrative expenses rose even more, and the extra gross profit didn't cover them. Energy storage was the same: more was installed, yet gross profit fell from last year; the company cites lower prices, product mix, and a warranty charge for an older battery cell issue.
1:18One more thing: second-quarter net income was a little over $1.1 billion, of which more than $0.7 billion after tax was a paper gain on its SpaceX stake, not cash from selling cars or storage; there was also a specific tax gain, which isn't cash received in the quarter either.
1:42Now the cash. In the second quarter, free cash flow as reported by the company was negative, more than $1 billion: the money put into production lines, computing power and the fleet exceeded operating cash flow.
1:56And about three-quarters of the first-half increase in operating cash flow came from changes in items such as payables and inventory; that may reflect normal growth and the timing of payments; it doesn't prove late payment, and it shouldn't be extrapolated.
2:16And spending is set to rise: the company's guidance puts this year's capital spending above $25 billion.
2:24It spent more than $8 billion in the first half, so under that guidance the second half has to exceed $16 billion.
2:32In the research, the strongest bear case isn't that Tesla lacks technology; it's that the technical progress and wider coverage may both be real, while the benefits go to cheaper car prices, suppliers, operations and maintenance, and stock compensation, leaving each share with too little cash return.
2:51Of course, the other side deserves a hearing too: excluding regulatory credits, the automotive gross margin rose year over year; gross profit from services also rose markedly, mainly from used cars, repairs and charging, so it can't all be counted as software profit.
3:09Over the past four quarters combined, free cash flow is still positive at more than $5 billion, but this year's first half produced only about $0.35 billion.
3:20At the end of June, the company still held more than $43 billion in cash and short-term investments, and at the end of September it signed a new $30 billion credit facility; but a credit line is money it can borrow, not money it earned. Low profits and one quarter of negative cash flow may also mean investing first and reaping later; they don't mean its competitiveness has been damaged.
3:45The analyst expectations in the research aren't on a consistent basis, so this episode won't judge a beat or a miss. When the third-quarter results come out, I'll watch three things.
3:57First, the operating margin: just 1.4% in the second quarter, versus 4.1% in the second quarter of last year; can it recover from that low, and does the recovery come from lower costs and paid revenue, or from regulatory credits and one-off accounting adjustments? If earnings per share look strong, first check whether that comes from selling cars and storage, or again from the SpaceX stake gain and tax items. Second, does any cash improvement come from earning more, or from timing, such as higher payables or delayed equipment payments?
4:38Third, does the full-year capital spending guidance change, and is that due to efficiency or project delays; do FSD and Robotaxi provide verifiable figures such as paid retention and utilization; if not, treat them as unknown for now, not as a failure. One quarter can't tell the whole story; it takes several quarters in a row.
5:06Tesla's revenue and operations are growing in scale, but it hasn't yet shown that this growth turns into lasting cash returns for every share. This is research commentary only, not investment advice; the author may hold the stocks mentioned. See you next time.
Before Alphabet reports Q3, a closer look at Q2: of the more than $9 in earnings per share, over $6 came from gains on equity investments. The money is real, but customers did not pay it.
