Tesla beats Q3 profit forecasts but shares slip on heavy AI spending plans

What happened

Tesla published its third-quarter update after the US market closed on Wednesday. Adjusted earnings per share came in at 48 cents, compared with the 43 cents analysts polled by LSEG were looking for, and revenue of $28.05 billion edged past the $27.9 billion estimate, CNBC reported. On a GAAP basis, profit attributable to shareholders was $787 million, or 22 cents a share, down from 39 cents a year earlier. Car revenue slipped 3% to $20.56 billion and energy revenue dropped 16% to $2.88 billion, while services and other sales rose 33% to $4.61 billion. The shares slid in after-hours trading and opened more than 3% lower on Thursday.

What it means

The quarter shows two Teslas pulling in different directions. The car business is barely growing: deliveries were 486,532, about 2% below a year earlier, and the company said battery supply limited how many vehicles it could build even though its order backlog is the largest in four years. Yet profitability per car got better. Automotive gross margin excluding regulatory credits, a measure of how much Tesla keeps from each sale before overheads, rose to 18.1% from 16.3% in the second quarter, helped by more deliveries in Asia Pacific.

The pressure sits further down the income statement. Operating income fell 56% to $718 million, leaving an operating margin of just 2.6%, as spending on AI projects such as self-driving software, robotaxis, the Cybercab two-seater and the Optimus humanoid robot climbed. Profit also took a hit from lower sales of regulatory credits, which fell to $113 million from $417 million. In other words, Tesla is using cash from its car and service businesses to fund bets that do not yet earn much.

The surprise was cash. Many analysts expected Tesla to burn money this quarter, but it generated about $1.5 billion of free cash flow, the cash left after investment, though that was still 62% lower than a year before. Tesla also cut its 2026 capital spending forecast to about $20 billion from more than $25 billion. Management called this capital efficiency, but analysts at JPMorgan and Barclays noted that some investors may read it as investment being pushed back, with comments on the call pointing to more spending in 2027 and 2028.

Elon Musk's own comments did much to cool the mood. He said Optimus still needs a lot of work before it is useful for open-ended tasks, that robotaxi revenue should start to show up in the second quarter of 2027, and that the Terafab chipmaking venture with SpaceX could eventually cost more than $100 billion. Musk opened the call by touching on the possible merger with SpaceX that he raised a day earlier, but added nothing new.

The bull case

Car margins are rising even without much sales growth, services revenue jumped by a third, and Tesla produced positive free cash flow when many expected a cash burn. It holds about $45.4 billion of cash and investments, has its biggest order backlog in four years, and active Full Self-Driving subscriptions rose 67% to 1.74 million. Supporters argue software, energy storage and robotaxis could lift earnings over time.

The bear case

Operating profit more than halved and car revenue keeps shrinking, while rivals compete hard in electric vehicles. Spending on AI, robots and chips is set to rise again in 2027 and 2028, and the biggest new revenue streams remain at least several quarters away. Musk himself tempered hopes for Optimus, and Goldman Sachs described the valuation as full.