- China Merchants Securities cuts Tesla (TSLA) to "Hold" with a $361 price target after weak Q2 results.
- Operating income plunges 42% YoY, with free cash flow at just $146 million amid heavy AI/robotics investments.
- Tariffs, slowing EV demand, and aggressive Chinese competition squeeze margins, raising doubts about near-term recovery.
A Challenging Quarter for Tesla
Tesla's Q2 2025 earnings fell short of expectations, prompting China Merchants Securities to downgrade the stock from "Buy" to "Hold" and slash its price target to $361. The electric vehicle giant reported non-GAAP EPS of $0.40, down 23% year-over-year, while revenue of $22.5 billion barely edged past estimates. More concerning was the 42% collapse in operating income to under $1 billion, with regulatory credits propping up results rather than core automotive margins.
Free cash flow dwindled to $146 million—a stark contrast to Tesla’s historical cash-generation strength—as the company funneled capital into AI, robotics, and manufacturing expansions. "The numbers reflect a perfect storm of margin compression and demand headwinds," said one analyst briefed on the downgrade, who asked not to be named discussing client research. Deliveries and energy segment performance also declined double-digits, compounding concerns.
Tariffs and Competition Bite
China Merchants cited rising input costs, aggressive pricing by Chinese rivals like BYD, and recent U.S.-China/EU tariff escalations as key pressures. Tesla’s Shanghai Gigafactory, once a profit engine, now faces tighter margins due to trade policies and local competition. While the firm continues betting on autonomous tech and Optimus robotics, "the payoff horizon is too distant to offset near-term erosion," the analyst added.
Tesla did not immediately respond to requests for comment. Shares fell 1.8% in premarket trading following the downgrade, extending this year’s underperformance against broader auto indices.