Tesla (TSLA) and Alphabet (GOOG) stocks retreated in the premarket session as market participants reflected on the second-quarter earnings. Google shares dropped by 3.40% while Tesla slumped by almost 8%.
Tesla’s third-quarter earnings
Tesla stock dropped to its lowest point since July 2nd after publishing another weak quarterly result. It has moved into a technical correction as it dropped by over 16% from its highest point this month.
Tesla’s financial results showed that its revenue rose from $24.9 billion in Q2’23 to $25.5 billion in the last quarter. Its automotive sales dropped from $20.4 billion to $18.5 billion, a retreat that was offset by an increase regulatory credits and energy generation and storage.
Tesla’s net profit crashed from over $2.6 billion in Q1’23 to $1.4 billion. This decline was partly because of its restructuring costs, which cost it over $622 million during the quarter.
The stock also dropped for other reasons. Its gross margins dropped from 18.2% to 18.0% as the company continued to cut vehicle prices as competition rose. Its operating margin fell from 9.6% to 6.3%.
At the same time, the company continued delaying its robotaxi business, which it hopes will boost its valuation in the coming years. Its robotaxis will leverage its artificial intelligence (AI) and autonomous technologies to disrupt an industry that is now dominated by the likes of Uber and Lyft.
A key concern for Tesla is that its stock is severely overvalued considering that its growth has stalled. It has a market cap of over $802 billion, making it bigger than companies like Toyota, General Motors, Ford, and Volkswagen, combined.
The company has a price/earnings ratio of 64 and a forward multiple of 115, which is hard to justify. For example, Nvidia, a company whose revenue rose by 200% in the first quarter, has a P/E ratio of 71 and a forward multiple of 71.
This overvaluation is happening at a time when growth in the EV industry is slowing while competition is getting stiff. Most of this competition is coming from China, where companies like BYD, Nio, Li Auto, and Xpeng are having double-digit growth.
The industry is slowing as more customers opt for hybrid vehicles like those made by companies like Ford and Toyota.
Therefore, the stock will likely continue falling in the near term as investors wait for its cheaper vehicle, which Elon Musk has promised to launch in 2025.
Alphabet stock falls after strong results
Alphabet, the parent company of Google, YouTube, and Android, reported strong financial results on Tuesday.
Its quarterly revenue rose by 15% in Q2 to $80.5 billion, helped by all its key segments. Search’s revenue rose by over $6 billion to $46.1 billion while YouTube’s rose to $8 billion. Google’s cloud computing business rose to $9.5 billion while services rose by $9 billion to $70.3 billion.
These results showed that Alphabet, a company that was started in 1996, is still having double-digit growth. This growth is happening because of its strong market share in industries like advertising and cloud computing. It is the third-biggest cloud computing company after Amazon and Microsoft.
Therefore, the Alphabet stock price dropped in the pre-market session as investors took profits since it has risen by 30.2% this year. It had risen to a record high into its earnings.
Still, in the long-term, Google seems like a good investment for several reasons. First, it has a commanding market share or an impenetrable moat in key industries. It is hard to create a competitor to YouTube and Google.
Second, the company is investing in the future while expanding its margins. Its operating margin rose from 27% to 32% in the last quarter and the company expects to continue growing its margins.
Third, Alphabet is returning huge sums of money to investors. In addition to paying a dividend, it has also started a $70 billion share repurchase program. Repurchases help to boost a company’s earnings per share by reducing the number of outstanding shares.
Further, the company’s valuation seems decent. It has a forward P/E ratio of 24, a few points higher than the S&P 500 index, which has a multiple of 21. It deserves this premium because it is growing at a faster pace than the S&P 500 index. Therefore, the stock could resume its uptrend in the coming months.
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