Why Tesla Stock Just Crashed

Tesla (TSLA -12.34%) stock fell 11% through 11:45 a.m. ET Wednesday after the company badly missed analyst forecasts for earnings Tuesday night.

Heading into the second-quarter report, Wall Street forecast the electric car leader would earn $0.62 per share on sales of $24.8 billion. Tesla exceeded the latter expectation, reporting Q2 sales of $25.5 billion. But this sales growth came at a cost to profit: Earnings were only $0.52 per share.

Not all Tesla's news was bad. Notably, the company's energy generation (i.e., solar panels) and storage (i.e., batteries) division -- which believe it or not is now more profitable (with an 18.9% gross profit margin) than the automotive business, doubled in size to $1.5 billion in sales. And free cash flow for the quarter increased nicely to $1.3 billion.

Automotive sales, however, fell 7% year over year. And total sales were up an anemic 2%, despite beating estimates.

Particularly worrisome is the fact that operating expenses surged 39% in the quarter. Falling sales and rising costs is not usually a recipe for strong profits, and this proved true for Tesla, too. The company's operating profit margin shrank by more than a third, to 6.3%. Operating profits fell one-third to $1.6 billion. Net profits cratered -- down 45%.

Even then, the bad news wasn't done. Turns out, both analyst forecasts and Tesla's $0.52 headline result were put in the form of pro forma, non-GAAP profits. When calculated according to generally accepted accounting principles, Tesla's profit per share was only $0.42.

So what does this mean for investors?

At $700 billion in market capitalization and with $12.4 billion in trailing earnings, Tesla stock currently costs more than 56 times trailing earnings. That wouldn't necessarily be a bad thing if Tesla was still growing its sales by 50% or 70% annually, as happened during the pandemic. However, with Tesla stock stuck nearly in neutral at a 2% sales growth rate, and profit margins plummeting, it's hard to call Tesla stock a buy.