Tesla's Third-Quarter Profit Plunge Continues Despite Margin Recovery
Operating income dropped by more than half as the company poured billions into AI and robotaxi development, even as automotive gross margins improved.
By Zanele Khumalo ·
Tesla’s third-quarter financial results, released after market close on Tuesday, confirm that the company’s bottom-line earnings are shrinking rapidly even as its core automotive profitability improves. The electric vehicle maker reported a 56% year-over-year decline in operating income, signaling that the cost of its ambitious expansion into artificial intelligence and humanoid robotics is outpacing the growth in its vehicle sales.
The numbers reveal a complex picture of stabilizing margins against a backdrop of heavy spending. Revenue landed at $28.05 billion, essentially flat with the previous year and in line with Wall Street’s consensus estimate. While non-GAAP earnings per share came in at $0.48, beating the expected $0.45, GAAP net income fell 43% to $787 million, or $0.22 per share. Total gross margin recovered to 19.6%, up from 18.0% a year ago and well above the 16.8% recorded in the second quarter.
The primary driver of the profit slide is the surge in operating expenses, which rose 39% to $4.78 billion. Research and development spending jumped 69% to $2.76 billion, fueled by investments in what Tesla calls “Super Intelligence,” the Optimus robot, and the Cybercab. Additionally, stock-based compensation reached $1.17 billion, nearly doubling from the $663 million reported in the same quarter last year. Capital expenditures also more than doubled to $4.73 billion, though this was a sequential decrease from the $5.79 billion spent in the second quarter.
Management attributes the flat volume in vehicle sales to supply constraints rather than a lack of consumer interest. The company stated that battery availability continued to limit production, with deliveries totaling 486,532 vehicles, a 2.1% year-over-year decline. Despite this, Tesla claims to hold the largest passenger vehicle backlog in four years. Average selling prices continued to fall, a trend that typically contradicts the narrative of a supply-constrained manufacturer.
Segment performance was mixed. Automotive gross margin excluding regulatory credits improved to 18.1%, aided by a better product mix and increased Full Self-Driving (FSD) subscription revenue. However, the energy segment saw revenue drop 16% to $2.88 billion due to tariff-related customer refunds, even as deployments rose to 13.7 GWh. Services and other operations were the standout performer, with revenue growing 33% to $4.61 billion and gross profit hitting a record $734 million.
The company’s cash position remains strong, with $45.4 billion in cash and investments at the end of the quarter. Free cash flow was positive at $1.53 billion, a sharp improvement from the negative $1.09 billion in the second quarter, though it was lower than the $3.99 billion generated a year ago. GAAP net income included a $288 million unrealized gain on bitcoin holdings, partially offset by a $142 million unrealized loss on its SpaceX equity investment.
Looking ahead, the path to meeting management’s 2026 capex guidance of over $25 billion appears steep. With $13.01 billion spent in the first nine months, Tesla would need to spend roughly $12 billion in the fourth quarter alone, more than double its biggest quarter to date. This suggests either a massive surge in spending in the coming months or a potential slip in the 2026 investment plan into 2027.
On the technology front, Tesla reported that active FSD subscriptions reached 1.74 million, a 67% increase, though this metric includes upfront purchases. The Robotaxi service accumulated nearly 2 million unsupervised miles by the end of the quarter, following the addition of the Cybercab to the Austin fleet. Management is scheduled to discuss these results in further detail during an earnings call later this evening.
The release underscores a company in transition, balancing the immediate need for profitable vehicle sales with the long-term capital requirements of its AI and robotics ambitions. While margins are recovering, the sheer scale of new spending is compressing profits, leaving investors to weigh the short-term pain against the potential long-term gains of its new product lines.
Source: Electrek
