Why Is Tesla Stock Falling If Its Business Is Stronger Than Ever?

All good things must come to an end, and the winning streak that the Dow Jones Industrial Average (^DJI -0.51%), Nasdaq Composite (^IXIC -0.18%), and S&P 500 (^GSPC -0.27%) managed to put together on Monday and Tuesday wasn't able to last for a third straight day. Rising bond yields raised new concerns about macroeconomic impacts, sending major market benchmarks downward to give back a portion of their gains from earlier in the week.

Data source: Yahoo! Finance.

Earnings season continued to feature new financial reports from key companies across the stock market, and many businesses had better performance than some had feared. Late Wednesday afternoon, all eyes were on Tesla (TSLA -3.48%) and whether the electric vehicle (EV) pioneer would be able to live up to high expectations. Even though the financial numbers were strong, shares eased lower, showing just how difficult it has been for high-growth stocks to make gains lately.

The latest from Tesla

As of 4:45 p.m. ET today, shares of Tesla were down more than 3% in after-hours trading. That wasn't as steep a decline as the EV maker's stock had experienced immediately after its release of third-quarter financial results, but it still marked a disappointing performance given the strong fundamental performance of Tesla's underlying business.

Many of the numbers were extraordinary. Total revenue jumped 56% from the year-ago quarter to $21.45 billion, on a 55% rise in automotive revenue. Net income doubled year over year before adjusting for extraordinary items, and even after doing so, earnings of $1.05 per share were up 69% from where they were 12 months previously. Free cash flow soared nearly 150% to $3.3 billion, helping to boost Tesla's amount of cash and marketable securities on its balance sheet to $21.1 billion.

Tesla cited several factors that influenced its results. On the sales side, larger delivery volume and higher average selling prices both boosted its top line, as did growth from non-automotive areas of the business. The strong U.S. dollar weighed on revenue to some extent, but didn't hold back Tesla from record performance.

Meanwhile, earnings benefited from the same factors, but higher costs for raw materials and logistics combined with foreign-exchange impacts and the costs of ramping up production at its new Gigafactories in Texas and Germany weighed on profits.

Beyond EV manufacturing, Tesla's results were interesting. Solar capacity deployed was fairly tepid at 94 megawatts, up 13% year over year but down more than 10% from where it was three months ago. However, energy-storage capacity deployed rocketed higher to 2.1 gigawatts, up from 1.3 gigawatts a year ago and 1.13 gigawatts in the second quarter of 2022.

Tesla continued to build out its network of support services, adding 41 store and service locations and 79 mobile service units to its fleet over the past three months. The company now has almost 4,300 Supercharger stations with nearly 38,900 connectors available as it aims to serve its growing customer base with the resources they need to stay on the road.

What else could Tesla do?

In light of those solid numbers, it's a little surprising to see Tesla's shares fall in price. Yet there were a few areas in which the company arguably could have provided more to investors.

Perhaps most noteworthy was the bare-bones description of Tesla's immediate outlook. The company repeated its long-held stance that it will try to boost manufacturing capacity consistently to achieve 50% average annual growth in deliveries.

Yet even though the latest report said once again that the automaker will look for ways to smooth out its production and delivery process to avoid end-of-quarter bottlenecks like the one that occurred at the end of September, it didn't go into any real detail about exactly how that will work.

Moreover, Tesla identified battery supply-chain issues as the key limiting factor to market growth. The company has done what it can to secure supplies of materials needed to produce batteries, but as competitors start fighting more aggressively for the same materials, Tesla could see cost pressures.

In the long run, the automaker's future relies not only on achieving dominance of the EV market but also on finding adjacent opportunities where it can profit from its expertise as well. It'll take years for that thesis to play out, and in the meantime, Tesla shareholders need to be prepared for share-price volatility in both directions -- even when it doesn't seem to make sense.