On the call, CEO Elon Musk stated that Tesla was facing “a bit of a hangover” caused by heavy competition from a flood of rival cars that, though “not compelling,” forced the EV giant to bolster sales by providing generous financing packages. The steep discounts helped lift Tesla’s auto revenues a bit, but they’re still lagging the company’s numbers from Q2 to Q4 of last year by around 10%. Net profit showed a similar pattern of decline, hitting $1.48 billion, an improvement on the disastrous Q1 showings, but way less than the $2.5-billion-plus posted as recently as Q2 of 2023.

The new results shocked the markets. On Wednesday, July 24, Tesla’s shares slumped 12% to $216, after falling 2% on Monday. All told, Tesla shed $113 billion in market cap over the two days, around the combined valuations of General Motors and Ford Motor. The big selloff contributed to a gigantic 3.4% blowout for the Nasdaq on Wednesday, its worst performance in over 18 months.

The lackluster results that Tesla keeps posting quarter after quarter raise a big question: What’s the durable, underlying profitability of the company’s auto business, which we’ll define to also encompass its services and battery segments? To get the answer, I calculated Tesla’s net GAAP profits over the past four quarters, making two adjustments. The first: eliminating one-time items. The second: removing regulatory credits that Tesla receives for surpassing emissions requirements in the EU, China, and California—credits which Tesla then sells to carmakers below the limits.

Tesla’s ‘normalized’ profits are extremely low

Over the past four trailing quarters, Tesla posted net earnings of $7.02 billion, after eliminating an extraordinary gain from a tax benefit in Q4 of last year. That figure includes an add-back of the $622 million in restructuring charges for Q2, net of the tax benefit. Of that, regulatory credits added $1.94 billion after taxes. Hence, Tesla’s bedrock, repeatable earnings for the 12-month period were $5.1 billion. By the way, that number is almost 30% lower than the $7 billion Tesla garnered, using the same adjustments, in its peak period running from Q4 2021 to Q3 of 2022.

Tesla’s profits as a share of sales were weak by industry standards, using our metrics based on fundamental profitability. It generated a margin of just 5.2% on its $95.4 billion in revenues. That’s better than Ford at 2.2%, but trails GM (6.1%), BMW (6.2%), Mercedes-Benz (8.8%), Stellantis (9.8%), and Toyota (10.8%). As for return on capital, Tesla’s anything but a superstar. On its $66.5 billion in shareholder equity, it earned a measly 7.5%.

How can a company showing profits this mediocre merit such an inflated valuation?

Just prior to the two-day drop, Tesla sported a market capitalization of $802 billion. At that number, its price/earnings ratio, based on the $5 billion in run-rate profits, would have been 160. By Wednesday, its cap had declined to $689 billion. Hence, its current multiple, based on my adjusted earnings model, stands at a still-gargantuan 140.

Of course, Musk claims that the advent of robo-taxis and autonomous driving will, as he said on the earnings call, “take the valuation to a pretty crazy number,” meaning way ahead of the pre-selloff $800 billion. But what’s a car company making $5 billion a year really worth, and how much are shareholders wagering on a profit moonshot when the projects Musk long has promised haven’t materialized? In contrast to Tesla’s P/E, by my calculations, of 140, Stellantis is at 3.1, Mercedes at 5.0, GM at 5.2, and Toyota at 8.6. So let’s put a P/E twice the size of Toyota’s on Tesla’s $5 billion in profits. That’s a valuation on what it makes, from the cars it sells now, of only $85 billion.

So Tesla investors are putting a $600 billion valuation—the difference between the current cap of almost $700 and that $85 billion—on Musk’s dreams for the future that as yet, haven’t generated dollars, euros, or yuan. That’s one hell of a bet. Still, investors just cut their wager by $100 billion in two days. Maybe that’s because Tesla’s looking more and more like its metal-bending peers, and not even like a star metal-bender at that.