Tesla's "life-or-death question": With the vast expanse of AI on the horizon, does its underwhelming car - making performance still matter?
Tesla (TSLA.O) released its second - quarter earnings report for 2025 after the U.S. stock market closed at around 4:00 a.m. Beijing time on July 24. In a nutshell, the second - quarter performance itself was quite good. However, Tesla is a stock priced based on future expectations. Especially at its current relatively high price of $330, an unexpected performance under high stock prices and low expectations is not really worth celebrating. Let's look at the key information:
1. Total revenue showed a good performance: This quarter's total revenue reached $22.5 billion, exceeding the market expectation by about $200 - 300 million. The revenue of the energy storage business was mediocre due to the impact of tariffs, which was already factored into the price. The service business continued to grow quarter - on - quarter this quarter and also performed well. However, the real surprise still came from the core automotive business, and the fundamentals of the automotive business finally began to recover!
2. Both the revenue and gross profit margin from car sales this quarter exceeded market expectations, getting out of the slump in the first quarter: In the second quarter, the revenue from car sales was $16.7 billion, finally showing an unexpected performance (the market expected it to be around $16 - 16.2 billion). The revenue from carbon credits was lower than expected due to policy factors, which was within expectations.
Regarding the most core automotive revenue (excluding carbon credits), it reached $15.8 billion this quarter, exceeding the market expectation of about $15 - 15.2 billion. This was mainly driven by the price increase after the launch of the updated Model Y Juniper.
3. The gross profit margin of car sales also began to rebound quarter - on - quarter due to the price increase after the launch of Juniper and the improvement of the scale effect: In the second quarter, the gross profit margin of automotive sales (excluding carbon credits and leases) was 15%, improving by 2.5 percentage points quarter - on - quarter. This was still mainly due to the higher pricing of the Model Y Juniper launched in the second quarter, which led to a higher unit price of car sales. Meanwhile, the decrease in depreciation and amortization costs this quarter due to the scale effect offset the adverse impact of the tariff effect.
4. The heavy investment in R & D expenses and capital expenditures was still for the ambitious AI business: This quarter's R & D expenses were $1.59 billion, $200 million higher than the market expectation. However, due to the quarter - on - quarter rebound in the gross profit margin (the fundamentals improved in the second quarter), both the operating profit and the profit margin increased quarter - on - quarter.
The operating cash flow this quarter increased due to the improvement of the fundamentals, but the capital expenditure was $2.4 billion, increasing by $900 million quarter - on - quarter! Tesla still heavily invested in the AI business. It added 16,000 H200 GPUs in Texas. As a result, the free cash flow decreased by $500 million quarter - on - quarter compared with the worst period of car sales in the previous quarter, reaching only $150 million this quarter.
Dolphin Research's overall view:
The second - quarter performance was good. However, since the first - quarter earnings report, the stock price reaching $330 was largely due to the normal progress of the robotaxi business and the pricing of most of the ambitious robotaxi and Optimus businesses. In fact, it was somewhat decoupled from the performance of the automotive fundamentals.
Given that the stock price is already at a relatively high level, the market will definitely be relatively strict. Therefore, compared with the second - quarter performance itself, it is more necessary to look from a future perspective:
1. The fundamentals of car sales are still under pressure:
a. The phase - out of the $7,500 IRA subsidy in the United States is the biggest negative factor: The $7,500 IRA subsidy under the U.S. Inflation Reduction Act will end on September 30. Although the U.S. demand is expected to be released in advance to some extent in the third quarter, the sales volume in the U.S. market will inevitably decline after the subsidy phase - out in the fourth quarter. Therefore, it highly depends on the mass production and launch progress of Tesla's long - awaited affordable Model 2.5.
b. The mass production of Model 2.5 has been postponed to the fourth quarter again: For Tesla's car sales, the new affordable model "Model 2.5" is still the most core variable, and its production and delivery progress is crucial to Tesla's car - selling fundamentals this year. Although there have been repeated rumors of its cancellation, this earnings conference confirmed again that this model will continue to be launched, but the mass production progress has been postponed by about one quarter and will be launched in the fourth quarter.
During this earnings conference call, Tesla mentioned that due to the priority of ensuring deliveries before the expiration of the IRA subsidy (prioritizing the North American market and maximizing the production of existing models before the expiration of the IRA policy), the mass production of Model 2.5 has been postponed to the next quarter and will be launched in the fourth quarter.
The postponement of the mass production and launch plan of Model 2.5 again may still lead to a further downward adjustment of the overall car - selling volume expectation for 2025 (currently, the market expects it to be between 1.6 and 1.65 million units). The specific mass - production ramp - up progress of this model still needs to be closely monitored.
(Note: The previous market expectation for the launch time of Model 2.5 was that it would be launched in the United States first, in Europe in August, and in China at the end of 2025. It was difficult to achieve large - scale deliveries before the fourth quarter. This time, the delivery of Model 2.5 has been postponed again.)
In terms of the gross profit margin, the adjustment of emission regulations will cause the regulatory credits to continue to decline in the following quarters, and the impact of tariff costs on car sales will also be fully manifested in the subsequent quarters, which may also lead to continued pressure on the gross profit margin in the short term.
Therefore, it can be seen that before the official launch of Model 2.5 in the fourth quarter, Tesla's car - selling fundamentals are expected to remain under pressure, and the energy storage business is also affected by tariffs, which will be fully reflected in the subsequent quarters.
2. In the ambitious robotaxi/FSD and Optimus businesses, the current progress is basically in line with the first - quarter plan. It is expected that the inflection point of technology and progress will come at the end of the fourth quarter and the beginning of 2026:
① In the robotaxi/FSD business:
a. In the robotaxi business: It continues as originally planned, with no incremental information
It is still progressing as originally planned. In June, it was officially launched in Texas, the United States. The first batch of 20 unmodified Model Ys have been put into small - scale trial operation.
Tesla's previous plan was to expand to multiple U.S. cities by the end of the year (the generalized end - to - end algorithm supports rapid expansion to other cities), with the goal of reaching 1,000 robotaxis within a few months. At the same time, it will expand geographically to San Francisco, Los Angeles, and San Antonio in the United States. According to Tesla's previous plan, it is expected to have a significant impact on the financial statements in the second half of next year.
This earnings conference's plan for this part of the business remains basically unchanged. Tesla is promoting regulatory approvals in multiple places such as San Francisco and Nevada, with the goal of covering about half of the U.S. population by the end of the year. The service area and vehicle models will show exponential growth.
b. In the FSD business: The time inflection point is expected to achieve another major breakthrough in the fourth quarter of this year and the beginning of next year
Currently, Tesla's FSD (intelligent driving for passenger cars) is still based on the V13 software version and the HW4.0 hardware. The market is still highly anticipating a major update of Tesla's next - generation intelligent driving version, which is also another major leap in the intelligent driving field (referring to the direct switch to the end - to - end route in the Tesla V12/V13 versions, which brought a significant performance improvement):
The market is still looking forward to the FSD 14.0 software version and the HW5.0 hardware version. The computing power of the HW 5.0 (recently named AI 5) hardware is expected to reach over 2000+ TOPS. Compared with the existing model, the model parameters of the FSD 14.0 version it supports will be several times that of the current one. It is expected that its performance will jump to a new level, thereby driving up the FSD penetration rate and the continued expansion of the robotaxi business.
In terms of progress, according to research, the current plan is to start the internal testing of the V14 alpha version in the fourth quarter of 2025 and officially launch the V14 version in the first quarter of 2026. Elon Musk also said at the 2025 annual shareholders' meeting that "HW 5.0 + V14 is the last piece of the puzzle to reach L5. In 2026, Tesla owners can sleep in the car."
② In the Optimus business: It is expected that the Gen 3 will start mass - producing for the first time at the end of 2025 and the beginning of 2026
According to Tesla's plan in the first - quarter conference call, thousands of robots will be put into trial use in Tesla's factories by the end of 2025. Tesla is confident that it can achieve an annual production of 1 million units within 4 - 5 years, and it is expected to reach this goal in 2029 or 2030.
This earnings conference's incremental information mentioned that the design of the Gen 3.0 version is complete, a prototype will be launched within three months, and mass production will start next year, with the goal of achieving an annual production of 1 million units in four years. The progress is basically in line with the previous plan.
According to research, Optimus is expected to launch the complete functions of the Gen - 3 generation at the AI DAY in October 2025. Compared with the Gen - 2 version, the Gen - 3 version has achieved a significant performance improvement and further cost reduction (the cost is expected to be reduced by $16,500). In terms of production planning, it is expected to start small - scale trial production in the first quarter of 2026 and large - scale mass production in the third quarter of 2026. So this inflection point of mass production and launch may also come in the fourth quarter.
Therefore, in Dolphin Research's view, the current stock price of $330 is still overvalued. Especially due to the postponement of the mass production of Model 2.5 and the continued phase - out of the $7,500 IRA subsidy in the United States, the fundamentals of car sales are likely to remain under pressure before the launch of Model 2.5.
However, in the ambitious businesses, whether it is the major iteration of the next FSD version or the upcoming launch and mass production of Optimus Gen 3, the inflection point of mass production and technology is approaching (around the end of the fourth quarter and the beginning of 2026). The story and logic are still very strong and cannot be falsified in the short term. So if the stock price corrects due to the expected performance of the car - manufacturing fundamentals, it will actually be a good opportunity to enter the market.
The following is a detailed analysis
I. Tesla: Finally delivered a good report card
1.1 Automotive revenue: The price increase after the launch of the updated Model Y drove the automotive business out of the slump
This quarter's total revenue was $22.5 billion, which actually performed well, exceeding the expectation of large banks around $22.3 billion that Dolphin Research saw. Although the energy storage business performed mediocrely, the impact of tariffs had actually been largely factored into the market price (the BBG expectation was relatively outdated). The real highlight was the revenue from car sales. After missing the market expectation for several consecutive quarters, due to the price increase after the launch of the updated Model Y Juniper, it finally showed an unexpected performance.
Specifically:
In the automotive business, this quarter's total revenue was $16.7 billion, finally showing an unexpected performance (the market expected it to be around $16 - 16.2 billion). The revenue from carbon credits was lower than expected due to policy factors, which was within expectations (since the exemption in the CARB states was revoked in May, and 50% of Tesla's regulatory credit revenue comes from the ZEV credits in the CARB states).
However, in terms of the most - concerned real automotive sales excluding carbon credits and lease income, this quarter's real automotive sales reached $15.8 billion, finally getting out of the slump in the previous quarter and exceeding the market expectation of about $15 - 15.2 billion. This was mainly driven by the price increase after the launch of the updated Model Y Juniper.
In the energy business, this quarter's energy business revenue was $2.8 billion, lower than expected, still mainly dragged down by tariffs. However, this impact has basically been priced in. In the service business, it performed well this quarter. The service revenue in the second quarter was $3.05 billion, increasing by $400 million quarter - on - quarter, mainly due to the incremental revenue brought by the continued expansion of Supercharger stations.
1.2 The gross profit margin of car sales finally began to recover!
In each earnings report, what is more important than revenue and the real incremental information has always been the performance of the automotive gross profit margin.
The automotive gross profit margin finally climbed out of the worst period of car sales in the previous quarter. The overall automotive gross profit margin rebounded from 16.2% in the previous quarter to 17.2% this quarter. The most core gross profit margin of car sales excluding carbon credits was actually far beyond expectations (actual 15.5% vs. market expectation of 13.3%)!
In other businesses, the gross profit margin of the energy storage business was unexpectedly good. Since Tesla's energy business mainly uses LFP batteries from China, it is greatly affected by tariffs. However, the actual gross profit margin still exceeded expectations. This may be because Tesla has a certain stockpile of LFP batteries, and the proportion of Megapack shipments has increased. However, this business will still be dragged down by the uncertainty of tariffs in the future. So Tesla also said that it will start producing LFP batteries locally in the United States this year to resist the impact of tariffs.
This quarter's gross profit margin of the service business was 5.4%, which actually increased quarter - on - quarter compared with the previous quarter and also performed well. This was mainly due to the increase in the gross profit margin driven by the continued expansion of Tesla's Supercharger network, which offset the negative impact of the used - car business.
