What was so bad about Tesla's Q2 earnings?

Tesla (TSLA -1.43%) reported earnings last week, and the stock has been in sell-off mode since. The numbers clearly didn’t impress investors, sending the stock, which was already struggling heading into the earnings release, into a tailspin. As of Monday, the stock was down more than 31% year to date, and it’s in danger of hitting a new 52-week low.

Could the stock be a good buy at its reduced valuation?

What was so bad about Tesla’s Q2 earnings?

Investors dumped Tesla’s stock after it reported its second-quarter earnings last week. The following day, the stock fell by nearly 15%, to just under $320, and it’s been falling lower since then.

Tesla’s revenue in Q2 rose 26% to $28.2 billion. But despite the strong top-line growth, the company’s overall net income declined by 5%, to $1.1 billion. While its revenue rose rapidly, its margins were lower as the electric vehicle (EV) company has faced greater competition of late.

Furthermore, the company’s free cash flow was negative at $1.1 billion, significantly worse than a year ago, when it was positive at $146 million. The company’s capital expenditures also totaled $5.8 billion, more than doubling the $2.4 billion that Tesla spent in the prior-year period.

High capital expenditures have been a concern for tech investors, and with Tesla investing heavily in robots and its future growth, while its core EV business isn’t producing strong profits, the stock has given investors plenty of reasons to be bearish.

Why Tesla’s stock may be heading even lower

Besides believing in CEO Elon Musk and his visions of massive growth for Tesla in the future, there isn’t much of a reason to buy shares of Tesla today. Its margins are worsening, profits are down, it’s spending more, and yet, the stock’s market cap remains incredibly high at $1.2 trillion. Based on analyst projections, it’s trading at more than 150 times its future profits.

Tesla’s future growth is uncertain. While it can boost revenue by lowering prices, that won’t help the bottom line. Meanwhile, with the company spending more aggressively, that may raise concerns about whether it will need to raise more money in the future.

Although Tesla has been a top growth stock in recent years, I don’t think that’s going to be the case in the future, given the risks it’s facing today and its high valuation; there’s plenty of room for the stock to go even lower.