To The Moon

The biggest troubling of Tesla isn't the short-term free cash flow (FCF) turning negative—the market actually expects to burn $3.25 billion, but actually only $10.9 billion is a "handsome number"; the real chronic poisoning is that the gross margin of the car business has dropped to 16.3%, closer to the level of traditional car manufacturers BYD and Toyota. 

tariffs coming

What does it mean to turn negative free cash flow? These companies will have to start borrowing heavily, issuing corporate bonds, and even increase capital to support AI infrastructure investment. Credit risk will gradually increase. Alphabet has already led this—almost $50 billion in equity financing plus $100 billion in debt raising. When the arms race of AI forced the world's most profitable group of companies from cash cow to borrowers, the whole valuation framework of technology stocks was being rewritten.

Musk's statement at the performance meeting was filled with his usual all-in gambler style: "This year is a year of super large capital expenditure. I am confident that everything we invest in will yield incredible returns. Perhaps the best return on capital expenditure we have ever seen. But the ruling given by the market was cruel: share prices plummeted 14.5% in a single day, evaporating about $200 billion in market capitalization.

Tesla Q2 recorded revenue of $28.5 billion and delivered a record high of 480,000 vehicles. But the adjusted EPS was only 0.33 dollars, significantly lower than Wall Street's expectations of 0.50 to 0.53 dollars. Operating expenses soared 47% to $4.35 billion, and operating profit margin plummeted to 1.4% from 4.1% in the same period last year. Capital spending surged 142% to $5.79 billion, and CFO Vaibhav Taneja confirmed that capital spending for the whole year would exceed $25 billion.

Alphabet Q2 revenue increased by 24% to $119.8 billion annually, and operating revenue increased by 30% to $40.8 billion. But free cash flow fell to minus $5.9 billion, because capital expenditure reached a record $44.9 billion.

To raise funds, Alphabet issued Class A and C shares and Mandatory Convertible preferred shares in June, raising $49.6 billion net. There was also a rights issue plan of up to $40 billion. For the first time in history, the world's largest digital advertising monopoly has had to reach out to capital markets because it spent too much money.

"Curse of Winners" by AI Capex Alphabet - the most profitable company on the planet, cash flow is showing red for the first time

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