Is Tesla’s Earnings Miss and Negative Free Cash Flow a Red Flag for Rivian and Lucid Investors?

Tesla (NASDAQ:TSLA) stock sank nearly 15% in value this week after reporting quarterly earnings. Clearly, the market disliked what it heard from the company’s management team, including CEO Elon Musk. But there was some good news tucked into the data-packed announcement.

On the positive front, Tesla’s sales rose 26% year-over-year to $28.24 billion, beating most Wall Street estimates. Gross margins, however, slid from 19.2% in the first quarter to 16.3%, reflecting weaker pricing power and various one-time charges. Weaker margins hurt the company’s adjusted earnings per share, which came in at $0.33, below consensus estimates of roughly $0.50.

Most importantly, Tesla revealed surging capital expenditures, which shot higher 142% year-over-year to $5.8 billion. The company confirmed that capital expenditures for the year will exceed $25 billion to support its ongoing efforts to scale for AI compute, robotics, and chip manufacturing infrastructure. Surging capital expenditures weighed on free cash flow, which came in at negative $1.09 billion for the quarter.

Why did the market punish Tesla stock so harshly following earnings? The biggest concern deals with the pace and scale of its robotaxi division’s expansion.

Last year, Elon Musk told investors that its robotaxi service would expand at a "hyper-exponential rate". This quarter, however, Musk took a more cautious approach, warning of a slower-than-expected rollout. Analysts pushed back on the tone shift, with one pressing Musk on why the company’s robotaxi fleet was stuck “in the dozens as opposed to hundreds,” as previous guidance had predicted.

The market is clearly concerned about Tesla’s rising capital expenditures amid limited traction in growth markets like robotaxis. In other words, the market wants to see more from the company in exchange for higher spending.

Does Tesla’s robotaxi struggles portend trouble ahead for other EV stocks like Rivian (NASDAQ:RIVN) and Lucid Group (NASDAQ:LCID), both of which are expected to benefit from growth in the global robotaxi market? The short answer is yes, but the full answer is more complicated.

Here’s how the news from Tesla impacts Rivian and Lucid Group

Robotaxis are set to become a major global market. Some experts believe that robotaxis could ultimately become a $5 trillion to $10 trillion market. Tesla is primed to take a huge chunk of this market. Its business is largely vertically integrated, with an ability to both manufacture the physical vehicles and create the software necessary for operating a robotaxi fleet at scale.

Rivian and Lucid have slightly different exposures. For now, these two businesses are positioned as supplier to the robotaxi market rather than direct competitors.

Popular ridesharing service Uber Technologies (NYSE:UBER), for example, is investing aggressively to scale its robotaxi fleet. But Uber doesn’t have any internal manufacturing capabilities. So, it must purchase vehicles from other companies.

Image source: Getty Images

Earlier this year, Uber agreed to purchase up to 50,000 Rivian R2 SUVs in a $1.25 billion deal. Uber also forged a $500 million deal with Lucid for 35,000 vehicles.

Tesla won’t be buying robotaxi vehicles directly from Rivian or Lucid given it can produce its own vehicles. But Tesla’s inability to scale it robotaxi fleet is an indicator that the robotaxi industry in general may be experiencing scaling issues. And while Rivian and Lucid have growth catalysts besides selling robotaxis, their respective deals with Uber show how lucrative that end market can be for both companies long term.

In short, investors should pump the brakes on expectations for Lucid and Rivian’s robotaxi growth potential. Robotaxis will still be a lucrative market long term. But judging by Tesla’s struggles, the next year or two may be more difficult for Rivian and Lucid when it comes to benefiting from robotaxi operators need for more fleet vehicles.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.