Tesla’s Spending Spree Is Raising Big Questions for Investors

Elon Musk is undoubtedly a visionary CEO—you have to be to lead two huge companies at the same time: Tesla (TSLA) and Space Exploration Technologies (SPCX). Musk made plenty of Tesla investors richer over the years, and he’s done pretty well for himself as well, with a net worth of more than $700 billion at this writing.

But in looking at Tesla’s most recent earnings report, I see numerous red flags of concern surrounding the electric vehicle company. On the surface, Tesla is selling more products and services than ever and generated more than $100 billion in revenue on a trailing 12-month basis for the first time.

But expenses are also through the roof. Margins are narrowing, expenses are growing, and cash is in short supply. It's against this backdrop that Tesla announced it expects capital expenditures of more than $25 billion this year, with that number likely to go up. And Tesla is seeking to borrow as much as $30 billion to fund its ambitious plans for artificial intelligence, unsupervised full self-driving technology, and robotics.

So, it’s no wonder why TSLA stock has plummeted more than 30% so far this year and is down a whopping 24% since its second-quarter earnings report on July 22. Let’s look at what ails Tesla right now and if it should change your investment strategy.

About Tesla Stock

First, let’s take a look at Tesla itself. The Texas-based company currently has a market cap of $1.1 trillion, making it the largest automaker by market cap, although it also has battery, AI training, energy generation, and storage businesses, as well as its robotics line. Despite its recent losses, shares are down only 7% in the last year, versus the S&P 500’s ($SPX) 16% gain.

However, TSLA stock remains extremely expensive, as investors have priced in a lot of future profits. The forward price-to-earnings (P/E) ratio is a whopping 170—but investors are used to that, as its five-year mean forward P/E is 163. Obviously, investors are more focused on Tesla’s potential and Musk’s vision than they are on the current valuation. That’s just part of what you get when you invest in a Musk company.

Tesla Misses on Earnings

Despite growing revenue, Tesla badly missed analysts’ expectations in the second quarter as the company’s spending significantly cut into profits. Revenue in the quarter was $28.23 billion, up 26% from a year ago, with automotive revenues leading the way at $20.51 billion—an increase of 23%. Tesla reported delivering 480,126 vehicles, up 25% from a year ago.

However, Tesla’s operating margins virtually vanished, falling from 4.1% to just 1.4% for the quarter. Operating expenses increased 47% from a year ago to $4.35 billion, and adjusted earnings were $0.33 per share versus expectations of $0.55 per share.

Tesla reported negative free cash flow of $1.1 billion for the quarter, and its cash and investments decreased by $1.2 billion. CFO Vaibhav Taneja told analysts in the company’s earnings call that capex more than doubled sequentially in the quarter, and the company expects it to increase more in the second half of the year. In addition, he said that the company’s capex will continue to grow in the next two to three years as the company increases production for Optimus robots, expands its robotaxi fleet, invests in AI infrastructure, and installs solar manufacturing capacity.

“We believe this is the right strategy to position the company for the next era,” he said. “We'll always make such investments in a very capital-efficient manner. The path to amazing abundance is ever challenging and requires making bold bets. Our progress will be non-linear. The future is going to be great. We are ready to rise to the occasion.”

Can Tesla Justify Its Spending?

That’s one thing about Tesla and Elon Musk. He’s never been shy about taking big swings. One of those swings is with the Optimus robot, which Tesla is building for both factory and household use. Musk envisions Optimus as being able to handle both basic chores and dangerous duties. Ark Invest’s Cathie Wood, who has been a longtime Tesla bull, has predicted that Optimus will be transformative in both homes and factories.

Tesla has decommissioned the manufacturing lines at its Fremont, California, factory for the older Model S and X vehicles to make room for Optimus production. Robots built there will be used for training and further development, the company said.

The company is delivering V14 of its full self-driving (FSD) technology to customers this summer. FSD subscriptions are a growing revenue stream for Tesla and a key feature that is boosting vehicle sales. “I think for a lot of people, they're actually buying Tesla full self-driving with a car attached, as opposed to a car with FSD,” Musk said on the earnings call. “They're coming into our stores in the U.S. and telling me they want the full self-driving and with whatever car it comes with, essentially.”

The trick for Tesla is whether it can perfect unsupervised FSD and convince regulators to make it available. Company robotaxis in test markets are running on early versions of its V15 software, but it’s unclear when it will be available for use.

Is TSLA Stock a Buy Today?

TSLA stock is a lot of hype, but it also could be justified. The 42 analysts tracked by Barchart covering the stock have a consensus “Moderate Buy” rating, with a mean price target of $405.40 that represents potential upside of 32%. But sentiment is all over the place, particularly after Tesla’s earnings. Deutsche Bank’s Edison Yu maintained his “Buy” rating but cut the price target from $465 to $420. Glenn Thum of Phillip Securities reiterated his “Sell” rating and assigned a price target of just $220. Alexander Potter of Piper Sandler cut his price target from $500 to $450 but still has a “Buy” rating.

Tesla could still be a big winner, but it’s also entering a period where its margins are shrinking, its free cash flow is in the red, and it will start borrowing money to finance its long-term plans. Musk has a good track record of success, but TSLA will likely be a chaotic stock to hold for the near term.