Tesla fell almost 13.5% in one day, its biggest intraday drop since June 2025 and the worst performer on the S&P 500 that day. The move followed a mixed quarterly report that left the market with more questions than answers. No downgrades came, but many firms cut price targets, a re-rating rather than a turn to bearish.
The numbers
Adjusted earnings came in at 33 cents, well below the 51 cents the street expected. That miss was a key driver of the selloff. Revenue topped forecasts at $28.24 billion against just under $26 billion expected, a 26% rise from a year earlier.
The automotive segment brought in $20.52 billion, up 23% year over year, but Tesla cut car prices to help drive those gains. The energy business, which covers solar and battery storage, rose 13% to $3.14 billion yet missed estimates. This segment had been a strong point in recent quarters and was not this time. Services and other revenue, which includes fees for repairing out-of-warranty vehicles, jumped 50% to $4.58 billion.
Margins and costs
Margins are the real problem. Even with better auto revenue, gross margins fell to 16.8% from 17.2% a year ago, missing the more than 19% analysts wanted. The drop came as the average selling price per vehicle fell and regulatory credit revenue declined.
Operating expenses climbed far faster than revenue, up 47% to $4.35 billion in the second quarter, as the company pours money into AI and other R&D. Operating margin plunged to 1.4% from 4.1% a year ago.
Cash and CapEx
Free cash flow turned negative, a deficit of $1.1 billion. The company generated $146 million in free cash flow a year ago and $1.44 billion in the first quarter of 2026. The negative result was expected but worse than expected. CapEx rose 142% to $5.79 billion from $2.39 billion in the same quarter last year. The CFO said Tesla plans to spend at least $25 billion on CapEx this year. Elon Musk called it "a massive CapEx year" and said he is confident the investments will yield "incredible returns. Really maybe the best CapEx returns we've ever seen."
Strategy shift and robotaxi
Musk has been open about moving the company away from vehicle sales toward a driverless robotaxi service. Tesla ramped production of its Cyber Cab and is remaking older factory lines in California to build the Optimus humanoid robot.
Active full self-driving subscriptions rose 56% in the quarter, bringing the total to 1.48 million subscribers. On robotaxis, which also use FSD, Tesla still lags far behind rivals like Waymo. Tesla says it is "ramping unsupervised robotaxi rides in several US markets," but it lacks the clearance needed to compete and still uses safety drivers. It now operates in seven metro areas after adding two markets that week.
Analyst reaction
Price targets came down across the board while ratings held:
- TD Cowen cut to $460 from $490, keeping a buy.
- Mizuho cut to $450 from $480, keeping outperform, saying Tesla stays well positioned to lead in physical AI and humanoid robotics over the long term.
- Roth Capital held its buy and $505 target unchanged, noting the Musk group of companies leans heavily on the future success of Tesla's Terafab; the firm expects $30 billion total CapEx over the next two years.
- Cantor Fitzgerald kept overweight but cut to $485 from $510, staying bullish despite year-to-date underperformance.
- JP Morgan held neutral with a $445 target, expecting Tesla to stay range bound near term.
So the picture is still broadly bullish on the long-term story, paired with wide price target cuts.
A trade idea
One approach to holding the stock through short-term margin compression while waiting for the long-term upside is a covered call. With 29 days left to August expiration, you could sell the $350 call for $9.50 against 100 shares. If the stock recovers to $350, that works out well short term; if it does not, you still collect $9.50 for holding the shares.
