A look at earnings reports from Alphabet and Tesla; Funny, scary deepfake

1) I've got my eye on two of the "Magnificent Seven" mega-cap tech stocks today...

Alphabet (GOOGL) and Tesla (TSLA) reported earnings after the close yesterday. And both tumbled in morning trading by 4% and 12%, respectively.

Let's take a look at Alphabet first...

I've consistently been bullish on the stock ever since I named it as a core holding in the first newsletter at my old firm Empire Financial Research on April 17, 2019. Since then, it's up 181% versus 89% for the S&P 500 Index.

When it comes to the recent earnings, Alphabet reported $84.7 billion in revenue in the second quarter – up a healthy 14% year over year (15% currency adjusted) and slightly above estimates.

Operating margin expanded nicely from 29% to 32%, which, combined with a 2.1% decline in the share count, drove earnings per share up to $1.89. That beat estimates of $1.84 and was good for an exceptional 31% year-over-year gain.

So why did the stock take a hit after such an exceptional quarter?

Well, in part it's just taking a breather after a roughly 30% gain for the year through yesterday's close.

Investors also found a few things to nitpick...

For example, YouTube's revenue of $8.7 billion was slightly below expectations of $8.9 billion.

And investors didn't like the guidance that capital expenditures ("capex"), which have nearly doubled this year as Alphabet invests heavily in the AI arms race, will continue to exceed $12 billion per quarter for the rest of this year (capex was $12.0 billion and $13.2 billion in the first two quarters).

At this morning's price around $174, the stock trades at 22.8 times this year's earnings estimates of $7.62 per share (which will rise after today's earnings beat) – almost exactly the same multiple as the S&P 500 currently.

It makes no sense that one of the greatest businesses of all time trades at about the same multiple as the average large U.S. business.

Looking ahead, I still like Alphabet's stock.

2) I haven't had a buy or sell recommendation on the stock for nearly a decade... but I continue to follow Tesla closely.

As longtime readers know, I think the company and its CEO Elon Musk are endlessly fascinating.

Back in 2013, I was dumb enough to be short the stock. But fortunately my cousin, a Stanford engineer, put me in touch with two friends (also Stanford engineers) who worked at Tesla... and they told me that Tesla was doing incredibly innovative things.

They also arranged for me to take a tour of the company, which I did on March 11 of that year, with two friends. Here's a picture of us that day:

I had the good sense to cover my short... but, alas, wasn't smart enough to buy it.

That's a huge miss, as the stock has risen 83 times from a split-adjusted $2.61 per share that day to around $216 per share this morning. (Calculating those numbers and writing that sentence causes me such pain!)

But turning to yesterday's earnings report and conference call...

Year-over-year automotive revenue fell 7%, which was offset by 100% and 21% increases, respectively, in the much smaller "energy generation and storage" and "services" segments. In total, revenue was $25.5 billion, up 2%.

While this number beat estimates of $24.6 billion, such paltry growth isn't what investors are looking for in such a richly valued growth stock.

Weakening demand and the price war among the many electric-vehicle makers worldwide forced Tesla to cut prices on its cars. And that whacked margins: Operating margins fell from 9.6% to 6.3%.

This caused adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") to fall 21%... and adjusted earnings per share to fall an even more precipitous 43% to $0.52 per share, missing estimates of $0.60.

My friend Anton Wahlman, who has long been bearish on Tesla, posted two columns with his take on the quarter. Here's the first: Tesla reports disaster financials. Excerpt:

Tesla reported second quarter financial results after the market closed on July 23, and they are a disaster. Here are the highlights:

Automotive revenue: Down 7% from last year

Earnings per share: Down 43% from last year

And as Anton continued:

Here is the kicker: "Automotive regulatory credits" were $890 million. That's 60% of total net profit, which was $1.478 billion.

Those "automotive regulatory credits" are what other automakers are forced to pay Tesla because governments around the world say so. It's like Burger King having to pay KFC $2 per burger sold. Atrocious.

He put it succinctly:

Folks, Tesla's financial situation is a disaster. Tesla's car business is shrinking, profits are collapsing, and 60% of the remaining profits come from government edicts.

Anton then published a second piece after the earnings call: Musk under pressure at Tesla, uses lawyerly cautious language. Excerpt:

Elon Musk started the call with a long update on things. The most important thing in his presentation was his tone, voice and overall willingness – or lack thereof – to be specific about timelines for the next products to be released.

Musk stuttered, stammered and had so many "ooouuuuhhhs" and "aaaahhhhs" that he clearly kept checking himself from saying something he wasn't supposed to. I didn't see who was in the room with him, but it felt like he was sitting around a small table with lawyers all around, including one or two looking over his shoulders.

As he said, there were "two Elons on the call":

I just described the first Elon, the one who spoke so carefully while stammering. There was also another Elon on the call, one who spoke effortlessly and did not stammer. Who was that latter Elon? It was when he was speaking about non-specific things and stuff that wasn't about Tesla directly. For example, when he commented on why GM's self-driving car had failed. Then, Musk was sharp and clear, not feeling any lawyer looking over his shoulder. There was no risk, on that subject...

Musk's psychology is easy to read, I think. He speaks slower and with an extreme stammer when he is held back. Why is he held back? In my opinion, because he's under legal pressure to not say something that will get the feds to press the big red button. Clearly there is something serious simmering just below the surface here.

So why would anyone want to own the stock today?

To answer this, I'll turn once again to my analyst Kevin DeCamp, who has also closely followed Tesla over the years...

Longtime readers know that Kevin has been bullish on the stock for more than a decade. And in my April 24, 2023 e-mail, I shared his bull case for Tesla. Since then, through this morning, the stock is up 34% – slightly better than the 32% return for the S&P 500.

In a private e-mail this morning, Kevin wrote:

Tesla's last two earnings reports have some good lessons on expectations and the volatility of high-multiple stocks.

In its first-quarter earnings report in April, Tesla missed expectations significantly, yet the stock rallied 12%!

Now, after missing second-quarter earnings by a similar magnitude, the stock is down 12%.

To explain this, Kevin says it comes down to a word: "expectations." As he continued:

Going into its first-quarter report, Tesla's stock was in a multi-year downtrend since its peak in 2021 and sentiment was extremely negative due to price cuts, falling margins, higher interest rates, and rumors that Musk might leave the company.

Thus, even when the company missed, things weren't as bad as investors feared so the stock rallied.

In contrast, coming into second-quarter earnings, the stock, after crashing in the first few months of the year, had soared a massive 81% in just the past three months thanks to optimism over huge growth in its energy storage business, significant progress on its full-self-driving (FSD) rollout, plans to start production on new models in early 2025, and relief that shareholders once again overwhelmingly approved Musk's 2018 pay package.

In short, after a big run-up in the stock, sentiment was overly bullish and it's selling off a bit as a result. It really is that simple.

Kevin also said he's paying attention to something else:

Instead of quibbling over the numbers, I'm focused on one of Musk's last comments on the earnings call:

The value of Tesla overwhelmingly is autonomy. These other things are in the noise relative to autonomy. I recommend anyone who doesn't believe that Tesla will solve vehicle autonomy should not hold Tesla stock. They should sell their Tesla stock. If you believe Tesla will solve autonomy, you should buy the stock. And all these other questions are in the noise.

I think he's right – and believe that Tesla will solve autonomy – so I'm looking forward to the company's rescheduled "robotaxi" day on October 10.

Thank you as always for your insights, Kevin!

3) On a lighter note, this short video of a romantic-sounding "conversation" between Musk and Congresswoman Alexandria Ocasio-Cortez ("AOC") made me laugh – and also scared me at how realistic deepfakes created by AI are becoming!

In all seriousness, I'll note that AI is still one of the biggest and most important investment trends I'm following...

In fact, I recently released a presentation detailing this investment opportunity in full – including footage of me on site at the AI "epicenter of the world."

You can see my whole presentation – and find out how to position yourself to profit from this megatrend – by clicking here.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.