Last week I published a post on how to read an earnings release. It focused on United Airlines (Ticker UAL) and Johnson & Johnson (Ticker JNJ). This week the market provided a few more earnings releases that helped solidify some of the lessons in that post.
Tesla and Alphabet reported Wednesday night. Southwest reported the same day. All three beat on revenue. All three sold off after reporting, and all three are still down as of writing this post.
If you read only the headline number, that stock move does not make sense. If you read the release like we discussed, all of it does.
Four mechanisms, three companies, one lesson. The headline is not the story.
Tesla: the two margins tell two different stories
Tesla reported revenue of $28.24 billion, up 26 percent from a year ago and comfortably ahead of expectations. Record deliveries. The fastest revenue growth in nearly three years. On the top line, an excellent quarter. There was a time in Tesla’s history when that would have driven the stock up significantly.
Now go one layer down. Adjusted earnings came in at 33 cents per share against roughly 51 cents expected. Net income fell five percent to $1.11 billion. We talked about this. Revenue up significantly yet net income is down.
This is where the margins come into play. Gross margin and operating margin. They both have meaning and they both have different indications about how a company is doing.
Gross margin is what is left of each sales dollar after the direct cost of making the thing you sold. For Tesla that is the car itself, the materials, the labor, the factory time. When gross margin falls, the problem sits in the product economics. Either you are charging less for what you sell, or it costs you more to make.
Operating margin is what is left after everything else, the research and development, the sales and administrative costs, the entire overhead of running the company. It tells you how efficiently the business operates around the product.
Now look at what Tesla reported. Gross margin fell to 16.8 percent from 17.2 percent a year ago, a decline of about four-tenths of a percentage point. Operating margin fell to 1.4 percent from 4.1 percent. One of those barely moved. The other lost roughly two-thirds of its value.
The gap between them tells you where to look.
The car business did get slightly less profitable, and the release says why. Average selling prices came down, which is the discounting question, and regulatory credit revenue collapsed to $146 million from $439 million a year ago. Those credits are close to pure profit, so losing them hits gross margin directly without anything changing about how the cars are built. Those credits are how Tesla made money when they were not selling as many cars.
But the far larger damage happened below that line. Operating expenses rose 47 percent to $4.35 billion as the company spent heavily on artificial intelligence and robotics. Operating income fell 57 percent to $398 million. This is the quandary of artificial intelligence discussed in Weekly Notes frequently. If you are invested in the companies that are part of the AI infrastructure, you want other companies to spend a lot on building out AI. If you are investing in companies that are utilizing AI, you are starting to be concerned about how much is being spent.
Back to the release. So the story is not mainly that Tesla has lost the ability to sell cars profitably. The story is that Tesla is spending enormous sums on things that are not cars. Gross margin alone would have understated the quarter. Operating margin alone would have overstated the problem with the vehicles. You need both to understand what is happening with the company.
Tesla again: the cash flow tells you what the revenue line will not
There is one more number in this release I want to discuss.
Capital expenditures are what a company spends on physical assets it will use for years, things like factories, equipment and computing infrastructure, as distinct from the day-to-day cost of operating. Tesla’s capital expenditures rose 142 percent to $5.79 billion.
Keeping it simple, free cash flow is the cash a company has left after paying both its operating bills and that capital spending. It is the money actually available to pay down debt, buy back stock, fund a dividend or set aside for later.
Tesla’s operating cash flow was strong, up 85 percent to $4.70 billion. But the capital spending was larger than that. Free cash flow came in at negative $1.09 billion, against positive $146 million a year ago and positive $1.44 billion just one quarter earlier.
Tesla burned cash this quarter for the first time in roughly two years.
That is not automatically a bad thing…… a company can spend heavily and be entirely right to do it, and Tesla is spending on what it believes will define its next decade. Whether that bet pays off is a separate question and not one I am answering here. Frankly I couldn’t answer it. Time will tell.
But this is a fact the revenue line cannot give you. A reader who stopped at record revenue, up 26 percent, walked away with much less than the full story.
Alphabet: know what is actually inside the number
Alphabet reported net income of $112.1 billion for the quarter, up 298 percent from a year ago. Diluted earnings per share of $9.11, against something under $3.00 expected.
That is one of the largest quarterly profits any company has ever reported. As always, it is not the full story.
Roughly $99 billion of it came from a single line called other income, specifically a gain on equity securities. Alphabet holds minority stakes (shares) in other companies, including Anthropic and SpaceX, and both saw enormous jumps in valuation during the quarter. Under the accounting rules Alphabet marks those stakes up to the new value and runs the increase through the income statement, whether or not it has sold a single share.
It is a paper gain. No customer bought anything. No product shipped. If those valuations fall next quarter, the same line runs the other direction. As of writing this post, valuations are down but there is time left in the quarter.
Alphabet’s own release tells you how to strip it out, and that is the part worth learning. The company disclosed that the equity gain added $6.26 to diluted earnings per share. Take the reported $9.11, subtract that $6.26, and you are left with $2.85. That is roughly what the operating business earned. Analysts were looking for about $2.89.
So the largest profit in the company’s history was, actually, a small miss.
This connects directly to what we covered last week on reported earnings versus adjusted earnings. The gap between the two numbers is where management tells you what to focus on, and your job is to decide whether you agree. Here the reported number is the flattering one and the adjusted number is the honest one, which is the reverse of the Johnson and Johnson example, and exactly why you check the direction every single time.
Alphabet again: the call can matter more than the release
The printed quarter was good. Revenue of $119.80 billion, up 24 percent, ahead of the roughly $116.9 billion expected. Google Cloud grew 82 percent to $24.8 billion. Search revenue rose 17 percent to $63.3 billion, roughly in line. Operating income rose 30 percent and operating margin improved to 34 percent from 32 percent.
Then management got on the earnings call.
Guidance is what management tells you to expect going forward. Alphabet raised its capital spending guidance for 2026 to a range of $195 billion to $205 billion, up from the $180 billion to $190 billion range it had set back in April. Second-quarter capital spending had already roughly doubled from a year earlier.
The market did not like this. It is worried about how much is being spent on AI. The stock sold off after the call.
Read that sequence again. Revenue beat. Cloud accelerating at 82 percent. Margins improving. Stock down anyway. The market was not trading the quarter that just ended. It was trading the tens of billions of additional dollars the company had just said it intends to spend.
The release reports on what already has happened. The earnings call is the story about the future. The market very often trades the future.
Southwest: the same fuel story, one week later
Last week’s post closed with United Airlines and a chain that linked the conflict with Iran in late February, to the oil spike in March, to a specific line item in a July earnings release. Southwest reported this week and ran that same chain again.
Southwest’s fuel bill rose 67 percent to $2.22 billion, an increase of roughly $889 million from a year ago. The company put a number on what that cost its shareholders, approximately $1.17 per share in adjusted earnings.
The quarter itself was strong. Record revenue of $8.4 billion, up 16.4 percent. Adjusted earnings of 94 cents per share against roughly 51 cents expected. A large beat by any measure.
Then came the guidance. Southwest moved its full-year adjusted earnings outlook to a range of $3.25 to $4.25 per share, replacing an earlier expectation of at least $4.00. Management tied the change to uncertainty from the conflict and the fuel volatility that came with it.
The stock sold off.
Record revenue, a large earnings beat, and the stock sold off anyway, because the number that moved the market was the one about the rest of the year. Same lesson as Alphabet, from an entirely different industry, on the same afternoon.
One honest caution before we tie this together. All three of these stocks are down since they reported, but this was also the week the conflict with Iran escalated again, oil pushed back above $100 a barrel, and the whole market sold off. So part of each decline is the company, and part of it is the war. There is no clean way to split the two on a week like this. Read the release to understand the business. Do not expect it to explain the ticker on a day the whole market is reacting to something else entirely.
The same four places
Outside of margins, nothing in this post required you to learn anything new. Most of what we discussed here mirrors the discussion on JNJ and UAL.
Revenue was the headline in every case, and in every case it looked good. All three companies grew, and grew well. The four mechanisms are what the headline left out. Margins told you Tesla’s growth was getting more expensive to produce and told you where the expense was coming from. Cash flow told you Tesla spent more than it brought in. Other income told you Alphabet’s historic profit was mostly on paper, not operating performance. And guidance told you Alphabet intends to spend far more than the market assumed, and that Southwest expects a harder second half than it did in January.
Four different ways a headline could mislead you, in a single week, and every one of them was sitting in the documents for anyone who kept reading.
Pull up the next release from a company you own. Find the revenue line, then keep going.
Start investing. Stay consistent. Give your money time to grow. Cheers!
Christopher
Full disclosure: I own Alphabet (GOOG). I do not own Tesla or Southwest Airlines. All three companies are used here solely as real-world teaching examples to demonstrate how to read an earnings release. Nothing in this post is investment advice, a recommendation to buy or sell any security, or a solicitation of any kind. I am not a licensed financial advisor. Please consult a qualified professional before making investment decisions.
Weekly Notes — August 29, 2026