Why Did Tesla Stock Rise Despite Poor Earnings?

Why Did Tesla Stock Rise Despite Poor Earnings?

Tesla’s stock price surged despite its Q1 2025 earnings falling far below expectations. This seemingly paradoxical phenomenon can be explained through a comprehensive analysis of its business structure, market expectations, strategic initiatives, and investor sentiment. Below are the key drivers:

I. Core Financial Metrics Underperformed

Tesla’s Q1 2025 earnings revealed some of its weakest performance in recent years:

1. Sharp Revenue Decline: Revenue dropped 9% YoY to $19.335 billion, nearly $2 billion below market expectations.
2. Plummeting Profits: Net income fell 71% YoY to $409 million, with adjusted EPS of $0.27—just one-third of consensus estimates.
3. Delivery Contraction: Vehicle deliveries fell 13% YoY to 337,000 units, the lowest since Q2 2024.
4. Core Automotive Weakness: Automotive revenue declined 20% YoY to $13.967 billion, shrinking its revenue share from 81.2% in Q1 2024 to 72.3%.

These metrics reflect intensifying competition in the EV market, softening demand, and rising cost pressures.

II. Key Drivers Behind the Stock Rally

1. Energy Storage Business Emerges as a Standout

The energy storage segment became the brightest spot in the earnings report:

• Explosive Growth: Energy storage revenue surged 67% YoY to $2.73 billion, increasing its revenue share from 7.68% in Q1 2024 to 14.1%.
• Record Installations: Deployments reached 10.4 GWh (+156.6% YoY), driven by Megapack, its large-scale battery system.
• Margin Expansion: Storage gross margins hit 28.8%, exceeding estimates of 26% and nearing automotive margin levels.
• Capacity Expansion: Tesla’s Shanghai Megafactory began operations with 40 GWh annual capacity, supporting over 50% growth in storage revenue for 2025.

Market Perception Shift: Investors are increasingly viewing Tesla as an “Energy + AI” company rather than a pure automaker. The rapid growth and profitability of its storage business offset automotive declines, providing critical valuation support.

2. Future Technology Breakthroughs

Elon Musk’s strategic updates during the earnings call ignited optimism:

• Full Self-Driving (FSD) Timeline:
  • Unsupervised FSD features to launch by late 2025, with full autonomy for millions of vehicles by H2 2026.
  • FSD’s “asset revaluation” potential: Software subscriptions could generate higher lifetime revenue per vehicle than hardware sales.
• Robotics Advancements:
  • Second-gen Optimus robot achieved 10kg weight reduction, 30% speed boost, and entered real-world testing.
  • Robotaxi trials (steering-wheel-free design) to begin in 2025, leveraging FSD for autonomous ride-hailing networks.
• New Product Pipeline:
  • Simplified Model Y/3 (priced at $25,000) launching in H1 2025 to target mass markets.
  • Cybertruck expanding into emerging markets like Saudi Arabia.

Investor Reaction: Despite short-term profit pressures, markets focused on long-term value creation. Morgan Stanley estimates FSD could contribute over $10 billion in annual profit by 2030 if adoption accelerates.

3. Shifts in Market Sentiment and Valuation

• Pessimism Already Priced In: After April 3 delivery numbers, Tesla’s stock had fallen 8%, with weak Q1 results largely anticipated. The earnings release triggered a “sell the rumor, buy the news” rebound.
• Macro-Driven Risk Appetite: Fed rate-cut expectations fueled inflows into high-growth tech stocks, with Tesla’s AI narrative (FSD, robotics) aligning with market trends.
• Short Squeeze Dynamics: Pre-earnings short interest stood at 3.2% (above tech sector averages). Better-than-expected storage metrics and Musk’s bullish outlook forced short covering.
• Technical Support: The stock found strong support near $160, triggering algorithmic buy signals.

4. Analyst Divergence and Opportunity Hunting

While some downgrades occurred (e.g., Citigroup cut its target from $192to$175), bullish analysts emphasized:

• Valuation Reset: Bank of America advocated using sum-of-the-parts (SOTP) valuation, assigning standalone value to the storage business.
• Margin Floor: Automotive gross margins of 17.4% (near historic lows) could rebound with 4680 battery scale-up and gigacasting efficiency gains.
• Policy Tailwinds: Extension of the U.S. Inflation Reduction Act to 2030 ensures $45/kWh tax credits for Tesla’s storage systems.

III. Risks and Challenges

Despite the rally, Tesla faces significant risks:

1. Persistent Automotive Weakness: Global EV adoption is slowing, with Chinese rivals like BYD intensifying competition in the $15,000-$30,000 segment.
2. Execution Risks: Regulatory hurdles for FSD and delays in Optimus/Robotaxi commercialization could disappoint.
3. Geopolitical Pressures: U.S.-China battery tariffs may impact margins at Tesla’s Shanghai Megafactory.

IV. Conclusion: Rebalancing “Reality” and “Vision”

Tesla’s stock surge reflects the market’s dual perspective:

• Short-Term Reality: Cyclical automotive challenges require price cuts and product simplification to retain market share.
• Long-Term Vision: Energy storage growth, FSD breakthroughs, and robotics ecosystems could unlock trillion-dollar opportunities.

This paradox—”bad earnings, rising stock”—highlights investors’ willingness to trade near-term volatility for long-term optionality. As Musk stated: “We’re willing to sell cars at zero profit because future autonomy services will create far greater value.” Success hinges on delivering technological milestones over the next 2-3 years.