Tesla (TSLA)

Electric vehicle pioneer Tesla (NASDAQ:TSLA) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 9.2% year on year to $19.34 billion. Its GAAP profit of $0.12 per share was 58.4% below analysts’ consensus estimates.

Key Topics & Areas Of Debate

The vast majority of Tesla’s revenue (76.9%) comes from electric vehicle (EV) sales, making metrics like units delivered and average sale price crucial for our analysis. However, two emerging questions are shifting the conversation beyond just car sales.

Can the Services segment - mainly consisting of low-margin maintenance and repairs today - decouple from vehicle sales with Tesla’s new AI-driven products?

Sparking hope for bulls are new technologies like Full Self-Driving (FSD) and a potential robotaxi fleet. If successfully commercialized, they could not only supercharge top-line growth but also lift Services gross margin from the high-single-digit percentages.

The second question is whether Tesla’s Energy Generation and Storage division could approach the value of its automotive business. While this may seem farfetched since Energy contributed just 11.7% of revenue last year, a case can be made.

GenAI applications could be the catalyst that accelerates this business as they require vast amounts of computational power. Furthermore, as energy disruptions from extreme weather become more frequent, Tesla’s products could emerge as critical infrastructure.

One standout product we’re closely watching in the Energy segment is the Megapack, a large-scale battery system that stores and distributes massive amounts of electricity. Each Megapack can power 100 to 150 homes for 24 hours and sells for over $1 million. Megapacks also have higher margins than EVs - in fact, a single Megapack sale generates as much operating profit as around 100 Tesla automobiles.

If Tesla can scale its Energy business and expand its software Services offerings, the growth potential is enormous and could settle the debate once and for all.

Originally founded by Martin Eberhard and Marc Tarpenning in 2003, Tesla (NASDAQ:TSLA) is an electric vehicle company accelerating the world’s transition to sustainable energy.

Tesla proves that huge, scaled companies can still grow quickly. The company’s revenue base of $26.02 billion five years ago has more than tripled to $95.72 billion in the last year, translating into an incredible 29.8% annualized growth rate.

Over the same period, Tesla’s automotive peers Rivian, General Motors, and Ford put up annualized growth rates of 262%, 6.4%, and 3.5%, respectively. Just note that while Rivian has the most similar vehicles to Tesla, comparisons aren’t exactly apples-to-apples because it’s growing from a much smaller revenue base and selling its EVs at a loss.

We at StockStory emphasize long-term growth, but for disruptive companies like Tesla, a half-decade historical view may miss emerging trends in autonomous vehicles and energy. Tesla’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 5.5% over the last two years was well below its five-year trend.

This quarter, Tesla missed Wall Street’s estimates and reported a rather uninspiring 9.2% year-on-year revenue decline, generating $19.34 billion of revenue. Looking ahead, sell-side analysts expect revenue to grow 12.8% over the next 12 months, an improvement versus the last two years. This projection is admirable for a company of its scale and illustrates the market is baking in success for its newer products.

Revenue: The Race For Dominance

Tesla is primarily an automobile manufacturer today and generates 76.9% of its revenue through the sale and leasing of EVs. It historically produced expensive, high-end EVs, but after years of operating losses, has shifted its focus to the mass market with affordable vehicles. The Model 3 and Model Y (released in 2017 and 2019) are the headliners of this story, and we’ll dive into their impacts below.

Over the last five years, Tesla’s vehicles sold grew by 34.6% annually to 1.74 million units in the last year. This is meaningfully above the its 27.1% annualized growth rate for Automotive revenue, implying that its average vehicle price fell.

Specifically, Tesla's average revenue per vehicle sold was $42,355 for the trailing 12 months, noticeably lower than the $56,544 price tag in 2020.

These unit and pricing trends uncover three facets of the company’s automotive business:

1) It has achieved its goal of selling more Model 3 and Model Y vehicles, which carry lower price tags than other models, 2) the scaling production of its mass-market models is boosting manufacturing efficiency because it lowers the fixed cost per vehicle sold, and 3) rather than increasing profitability by reaping the cost-saving benefits, Tesla is passing them to customers through price reductions.

In Q1, Tesla’s vehicles sold shrank by 13% year on year to 336,681 units and missed Wall Street’s expectations. Putting this print side-by-side with its 19.6% Automotive revenue decline suggests an average vehicle price of $41,484, down from $44,926 in the same quarter last year.

Unit Economics: The Impact Of Price Cuts

There’s no denying automobile manufacturing is a tough business. Few upstarts succeed because incumbents like General Motors and Ford can afford to break even on the initial sale of vehicles and instead make money on parts and servicing, which come many years down the line. This is why new entrants such as Rivian have negative gross margins - they must price competitively, and their fleets are too young to generate substantial aftermarket revenues.

Tesla does not disclose the operating profitability of its segments, but we can analyze the gross margins of its various divisions to see how it stacks up. For Automotive, this metric reflects how much revenue is left after paying for the raw materials, components, and direct labor costs that go into manufacturing and producing its vehicles.

Thankfully for investors, Tesla has crossed the chasm as its Automotive segment boasted an average gross margin of 23.2% over the last five years. While it may be low in absolute terms, Tesla’s margin was best in class for the industry and illustrates its superior pricing power and procurement capabilities. Its breathing room also explains why the company can squeeze its competitors by slashing prices.

Looking under the hood, Automotive’s annual gross margin fell from 22.4% five years ago to 18.7% in the last year. This is a direct result of its price cuts and shows the company is sacrificing higher profits today to increase its installed base and potentially secure longer-term recurring revenue streams. Its gross margin ticked lower this quarter to 16.2%.

Revenue: Powering The Business

Tesla is known for its EVs, but the biggest debate surrounding the stock isn’t directly tied to car sales. What the market ponders is whether Services (11.4% of total revenue) and Energy Generation and Storage (11.7% of total revenue) can become much more vital parts of its business. Services has recurring revenue characteristics and a pipeline of bold new AI-driven products while Energy has higher margins than Automotive and a huge underpenetrated market opportunity. You can see why there is excitement here.

Digging in, Services revenue grew at a 36.5% annualized rate over the last five years, 6.8 percentage points faster than total revenue. The previous two years saw deceleration as it grew by 27.9% annually, though this isn’t concerning since it’s still expanding quickly.

Switching to Energy, revenue grew at a fantastic five-year pace, clocking in at 49.5% annualized. This performance, like Services, trumped its total revenue growth by 19.7 percentage points. On a two-year basis, growth accelerated to 52.3%.

This quarter, total revenue fell by 9.2% year on year while Services and Energy grew by 15.3% and 67%, respectively. If this trend continues and it can consistently win EV market share, Tesla’s stock price could see some support.

Unit Economics: What Can Supercharge Profitability?

Energy is currently Tesla’s shining star as it’s the fastest-growing and most profitable segment. It posted a gross margin of 27% over the past 12 months, up from 12.9% five years ago. Once the renewable energy market matures, margins could certainly rise further if the company continues developing premium products like the Megapack, an innovative battery system that stores and distributes electricity.

Conversely, Services has much to prove as its paltry gross margin of 5.8% over the last year was a drag on the company’s overall unit economics. This margin is underwhelming because the business mainly consists of physical parts and repairs. It’s also surprisingly below Ford and General Motors’s 15-25% for the segment - a wide gap exists because the EV supply chain and ecosystem are less developed, resulting in higher servicing costs for Tesla.

Although we typically assess long-term historical trends, they aren’t as relevant for Services. The debate centers around whether Full Self-Driving (FSD) and robotaxis will ever be fully commercialized, and their impacts aren’t reflected in company financials yet. We lack details and management guidance on these ventures, but bulls would argue that margins could move structurally higher if these revenue sources scale. Bears would argue these business lines are a pipe dream.

This quarter, Services and Energy produced gross margins of 3.8% and 28.8%, respectively. We’ll keep a close eye on Tesla from here. Should any of the company’s ambitious bets (FSD, robotaxis, Megapacks) succeed, bulls will be rewarded handsomely because revenue and profitability would surge, allowing the market to assign the stock a premium valuation multiple due to the higher proportion of recurring, higher-margin, and secular revenue streams. However, if these initiatives fail to materialize or take longer than expected, shareholders could be in for a bumpy ride.

While gross margins showcase the unit economics of a business, operating margin is a more holistic measure of profitability because it displays the portion of revenue remaining after subtracting all day-to-day expenses, including the cost of sales we talked about earlier to selling, marketing, product development, salaries, and rent.

Segments aside, Tesla’s consolidated gross margin averaged 20.9% over the last five years, a tough starting point for operating profits. This contributed to an average operating margin of 10.2%, subpar for a scaled industrials business but surprisingly good when considering the automotive industry’s feeble unit economics.

Looking at the trend in its profitability, Tesla’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Tesla generated an operating profit margin of 2.1%, down 3.4 percentage points year on year. Since Tesla’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Looking ahead, Wall Street expects Tesla to become more profitable. Analysts are expecting the company’s trailing 12-month operating margin of 6.6% to rise to 8.6% in the coming year.

We track the long-term change in earnings per share (EPS) alongside revenue and margins because it shows whether a company’s growth is profitable and what else affects shareholder returns.

Tesla’s EPS grew at an astounding 158% compounded annual growth rate over the last five years, higher than its 29.8% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

Tesla’s two-year annual EPS declines of 26.6% were bad and lower than its 5.5% two-year revenue growth.

In Q1, Tesla reported EPS at $0.12, down from $0.32 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Tesla’s full-year EPS of $1.82 to grow 30.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Tesla has shown poor cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 6.6%, lousy for an industrials business.

Taking a step back, we can see that Tesla’s margin dropped by 4 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle as it pursues new AI technologies such as a robotaxi or humanoid robot fleet.

Tesla’s free cash flow clocked in at $664 million in Q1, equivalent to a 3.4% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Tesla’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 7.1% for the last 12 months will decrease to 4.7%.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Tesla hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 29.9%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. While Tesla’s ROIC fell recently due to its price cuts, the broader trend is still healthy as its ROIC is higher than a few years ago. This is because it’s investing aggressively to capture the AI opportunity. Only time will tell if these investments bear fruit in higher long-term ROICs.

Big corporations like Tesla are attractive to many investors in times of instability thanks to their fortress balance sheets that buffer pockets of soft demand.

Tesla has an eye-popping $37 billion of cash on its balance sheet (that's no typo) compared to $7.53 billion of debt. This $29.47 billion net cash position is 4% of its market cap and shockingly larger than the value of most public companies, giving it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We struggled to find many positives in these results as Tesla delivered fewer vehicles than forecasted, its revenue in all three segments (Services, Automotive, and Energy) missed, and its EPS fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $238.01 immediately following the results, likely because expectations were already so low going into the print. 

Updated: July 10, 2025 at 11:00 PM EDT

When considering an investment in Tesla, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Tesla isn’t a terrible business, but it doesn’t pass our quality test. Although its superb long-term revenue growth driven by Energy underscores its exciting and untapped market opportunity, its falling returns show it may be getting harder to find good investments. And while the company’s stellar ROIC suggests it has historically done an exceptional job picking markets to invest in, the downside is its falling cash profitability means it’s investing heavily into AI.

Tesla’s price-to-earnings ratio based on the next 12 months is 118.7x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $304.90 on the company (compared to the current share price of $311.50), implying they don’t see much short-term potential in Tesla.