Tesla (TSLA.US) Q2 net profit misses expectations and gross margin drops further, free cash flow turns negative, stock price plunges over 4% after hours

According to Zhitong Finance APP, Tesla (TSLA.US) announced its results for the second quarter of 2026. Although revenue exceeded market expectations, net profit, earnings per share, and gross margin all fell short of Wall Street forecasts, and free cash flow turned negative, reflecting the profitability pressure from the company's continued investments in artificial intelligence (AI) and robotics. Affected by the results, Tesla's stock price fell by more than 4% in after-hours trading on Wednesday.

The financial report shows that Tesla’s adjusted earnings per share (EPS) for the second quarter was $0.33, lower than the market expectation of $0.51; revenue was $28.24 billion, higher than the market expectation of $25.71 billion, representing a year-on-year increase of 26%.

However, the company’s profitability continues to be under pressure. Second-quarter net profit fell 5% year-on-year to $1.11 billion, missing expectations, with earnings per share of $0.32; the same period last year were $1.17 billion and $0.33, respectively.

By segment, automotive business revenue increased by 23% year-on-year to $20.52 billion; energy business (including solar and energy storage systems) revenue grew by 13% year-on-year to $3.14 billion; services and other business revenue saw a sharp rise of 50% year-on-year to $4.58 billion.

Despite the automotive business revenue performing better than expected, Tesla's gross margin continued to decline due to a decrease in average selling price per vehicle and reduced regulatory credits income. Second-quarter gross margin fell to 16.8% from 17.2% a year earlier, below the market expectation of 19.4%.

The financial report shows that during this quarter Tesla discontinued sales of the higher-priced Model S and Model X, and began selling lower-priced versions of Model 3 and Model Y, which dragged down overall profitability.

Meanwhile, operating expenses increased by 47% year-on-year to $4.35 billion, rising much faster than revenue, mainly due to continued increases in AI and R&D investments. As a result, operating profit margin dropped sharply from 4.1% to 1.4% year-on-year.

In terms of cash flow, Tesla’s free cash flow turned negative to -$1.1 billion in the second quarter, compared with a positive $146 million in the same period last year and $1.44 billion in the first quarter this year.

However, the company stated that it will continue to maintain a sound balance sheet and ample liquidity to support funding for its future product roadmap and long-term capacity expansion plans (including further vertical integration).

Meanwhile, capital expenditures soared 142% year-on-year to $5.79 billion. Tesla’s CFO Vaibhav Taneja previously stated that the company’s full-year capital expenditure for 2026 is expected to exceed $25 billion.

Tesla noted that several multi-year infrastructure projects related to AI computing power, solar energy, battery materials, and semiconductor manufacturing have already commenced.

In recent years, as automakers such as BYD, NIO (NIO.US), and Xiaomi Group have continued to launch cost-effective smart electric vehicles, Tesla’s vehicle deliveries have declined for several consecutive years. In addition, Elon Musk’s political remarks and his collaboration with the Trump administration have also led to some consumers boycotting the Tesla brand.

However, the conflict between the U.S. and Iran has led to an increase in gasoline prices, which to some extent has stimulated demand for electric vehicles in the first half of this year, with sales in the European market improving.

Currently, Tesla is gradually shifting its strategic focus from car sales to AI and autonomous driving businesses. Elon Musk is accelerating the advancement of the Robotaxi self-driving taxi service and mass production plan for the Cybercab autonomous vehicle and is upgrading the Fremont, California factory production line to prepare for the rollout of the Optimus humanoid robot.

The company stated in the financial report that the production line for the first generation of Optimus robots has started installation and production will begin soon. The initial batch of robots will mainly be used for training data collection and function development, rather than direct delivery to customers.

At the same time, Tesla’s advanced driver-assistance system FSD subscription business continues to grow. The company stated that active FSD subscription users grew by 56% year-on-year in the second quarter, reaching a total of 1.48 million subscribers.