Market Woes Set Bearish Mood Ahead of Tesla's (TSLA) Q2 Earnings Call

Business Insider

5 days ago

Tesla's (TSLA) stock is once again on the rise ahead of its Q2 earnings report, scheduled for release after tomorrow's market close. With Q2 vehicle deliveries already disclosed earlier this month at 384,000 units, investor attention now shifts to profitability, strategic execution, and Tesla's ability to maintain its competitive edge.
Elevate Your Investing Strategy:
Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.
What's clear is that the days of unchecked, hyper-growth driven by EV manufacturing alone are behind us. Going forward, Tesla's success hinges on its ability to monetize emerging ventures like Robotaxi and Full Self-Driving (FSD). That said, the road ahead is filled with uncertainty—and at Tesla's current premium valuation, the margin for error is razor-thin. As a result, I remain Bearish on TSLA stock.
Automotive Woes and Margin Compression
First and foremost, market participants are seeking an update to the lifeblood of Tesla's business: its automotive segment. Due to increasing competition and a decline in demand for EVs, consensus estimates point to another challenging quarter for Tesla with double-digit decreases in year-over-year revenue.
Tesla's market share is eroding globally. In fact, as of 2024, China-based BYD (BYDDF) is now the world's leading EV manufacturer by volume. This is especially a problem in China, which represents 21% of Tesla's revenue. Once a key growth engine for Tesla, vehicle sales in China are falling over 10% year-over-year. This is particularly worrisome when considering that the overall Chinese EV market is surging, which suggests that Tesla is losing market share.
Secondly, Tesla faces a multi-front threat to its profitability. In the second quarter of last year, Tesla's automotive gross margin (ex-credits) was 18.3% and decreased to 16.3% in Q1 this year.
Analysts anticipate further margin compression this quarter—and for good reason. Demand for Tesla's Model 3 and Model Y has weakened amid growing competition and more diverse offerings from rivals, as shown by production consistently outpacing deliveries. Like the broader EV industry, Tesla is also grappling with macroeconomic pressures. Elevated interest rates have made car payments less affordable, prompting buyers to opt for lower-priced, lower-margin models like the Model 3. In response to softening demand and rising competition, Tesla has introduced temporary price cuts, which are likely to weigh further on average selling prices and profit margins.
TSLA Looks to Save the Day by Pivoting to Robotics & AI
Tesla's lofty valuation—reflected in a P/E ratio of 181, more than 800% above the sector median—is largely built on investor confidence in its bold pivot toward artificial intelligence and robotics. The centerpiece of this AI narrative is Tesla's push for full autonomy, recently marked by the launch of a small fleet of around 20 robotaxis in Austin, Texas. While this marks a notable step, it's limited to a tightly geofenced area, making a broader rollout across major U.S. cities unlikely in the near term.
At the helm, Elon Musk has gone on record to claim that 'millions of Teslas will be operating fully autonomously in the second half of next year [2026].' However, his track record includes many ambitious promises that were either delayed or never realized. Still, Tesla may unveil early proof-of-concept data from Austin in its earnings report, and potentially, reveal a firm timeline for launching its vast network of autonomous vehicles (AVs).
Investors are also eyeing potential updates on Optimus, Tesla's humanoid robot initiative. Musk previously stated a goal of producing ~5,000-12,000 units this year and recently teased 'the most epic demo ever,' fueling speculation that the production-ready Optimus V3 may soon be revealed. However, skepticism remains high, given Musk's history of overpromising and the long road ahead for humanoid robotics. Realistically, Optimus remains a long-duration, high-risk R&D effort, with little chance of meaningful revenue contribution for years to come.
Is TSLA Stock a Buy, Sell, or Hold?
On Wall Street, TSLA carries a consensus Hold rating based on 13 Buy, 13 Hold, and eight Sell ratings in the past three months. TSLA's average stock price target of $299.52 implies a downside potential of almost 9% over the next 12 months.
Earlier this week, Wall Street analyst Alexander Potter reiterated a Buy rating on TSLA with a price target of $400. Sandler believes concerns surrounding the impact of regulatory changes (EV tax credit) are overblown, stating, 'We think that while it's true that the U.S. government is committed to rescinding financial support for the EV and battery industries, Tesla will still book around $3 billion in credits this year, followed by $2.3 billion in 2026.'
Tesla's Sluggish EV Growth and Unproven AI Ambitions
Tesla's second-quarter earnings are likely to confirm what the market already suspects: its core EV business is losing momentum. With the company's lofty valuation now increasingly tied to its ambitions in AI and robotics, the focus is shifting from vision to execution. The market will soon demand real, near-term progress—not just bold promises.
At the same time, Tesla must also defend its legacy automotive business, a tall order for any single company. Given its elevated valuation and the lack of immediate breakthroughs in its emerging tech initiatives, I'm staying Bearish for now.
That said, for investors with a higher risk tolerance and a taste for short-term speculation, there's a case to be made. If Tesla falls short of expectations, it could trigger a sell-off, presenting both a selling opportunity in the near term and a potential buy-the-dip entry point for those who believe in Tesla's long-term dominance across EVs and robotics.