Why is Tesla's stock down 12 percent today?

Tesla’s stock fell by about 12 percent on Thursday. Investors were alarmed by the disappointing earnings, the negative cash flow, and the sharp rise in investments in artificial intelligence, robotics, and self-driving vehicles.

The poor market climate is also taking its toll on Tesla. The price of oil is rising toward $100 per barrel, while the U.S. dollar and interest rates are climbing. This makes expensive technology stocks particularly vulnerable.

Tesla reported adjusted earnings of 33 cents per share in the second quarter. Analysts had expected an average of about 50 cents. Revenue, at $28.24 billion, actually exceeded expectations.

The disappointing earnings show that Tesla is struggling to translate strong sales figures into higher profits. The company delivered a record 480,126 vehicles in the past quarter. As a result, revenue from the automotive division rose 23 percent to $20.52 billion.

However, margins lagged behind. The automotive division’s gross margin, excluding revenue from carbon credits, came in at 16.3 percent. Analysts had expected 19.4 percent. According to the reported figures, operating income also fell by 57 percent compared to a year earlier.

Newsbit reported on Wednesday that Tesla’s figures were deeply disappointing. In after-hours trading, the decline was initially limited to a few percent. After Wall Street opened, selling pressure quickly intensified.

The biggest concern among investors revolves around Tesla’s massive investments. Capital expenditures rose by 142 percent in the second quarter to $5.79 billion.

Tesla expects to spend more than $25 billion this year. That money will go toward data centers, artificial intelligence, the Optimus robot, the Cybercab, and the further expansion of the Robotaxi service, among other things.

Due to these high expenditures, free cash flow came in at a negative $1.09 billion. It was the first negative free cash flow in over two years. However, the shortfall was smaller than the $3.64 billion analysts had anticipated.

CEO Elon Musk tried to allay concerns during the earnings call.

“This is a year of massive capital expenditures. I am confident that everything we are investing in will yield incredible returns,” Musk said.

For now, investors must rely primarily on that promise. A large part of Tesla’s high valuation is based on future revenue from self-driving taxis, artificial intelligence, and humanoid robots. The traditional automotive division is growing again, but is generating less profit than expected.

The stock price decline isn’t entirely isolated. Oil prices rose sharply on Thursday due to renewed tensions in the Middle East. Brent crude briefly surpassed the $100-per-barrel mark.

Higher oil prices could reignite inflation. As a result, investors are anticipating higher interest rates from the U.S. Federal Reserve. The yield on 10-year U.S. Treasury bonds rose to about 4.7 percent. The dollar index also gained about 0.2 percent.

Rising interest rates hit technology companies particularly hard, as a large portion of their expected profits lies far in the future. These future earnings are worth less when interest rates are higher. Tesla is hit twice as hard by this. The company is investing billions in projects that are not expected to generate revenue until later, while its current profitability is under pressure.

Furthermore, the strong dollar can be detrimental to U.S. companies that generate a large portion of their revenue outside the United States. Foreign revenue loses value when converted to dollars.

Alphabet faced similar concerns on Thursday. Google’s parent company lost about 6 percent after raising its projected capital expenditures to between $195 billion and $205 billion. Despite strong growth at Google Cloud, investors focused primarily on the costs of the AI race and the negative free cash flow.