Tesla margins recover, but profits still drop

Tesla’s third-quarter earnings reveal a mixed picture where improving profitability in its core auto business was overshadowed by a steep decline in overall operating income.

The company reported revenue of $28.05 billion for the quarter, matching the $28.06 billion expected by Wall Street. This figure is essentially flat compared to the $28.1 billion posted a year ago. Non-GAAP earnings per share came in at $0.48, beating the $0.45 consensus estimate. However, this represents a 4% decline from the $0.50 per share recorded in the same period last year. On a GAAP basis, net income fell 43% to $787 million, or $0.22 per share.

The improvement in margins was driven by a better product mix and higher FSD subscription revenue, which pushed automotive gross margin excluding regulatory credits back above 18%. Specifically, this metric rose to 18.1%, up from 16.3% in the second quarter. Despite this recovery, operating income dropped 56% year over year to $718 million. This decline occurred because spending on AI and the Optimus robot grew faster than gross profit. Operating margin stood at 2.6%, a significant drop from 5.8% a year ago, though it was an improvement from the 1.4% seen in the previous quarter.

Management attributed the flat vehicle sales to battery availability rather than weak demand, stating that battery supply was the limiting factor for increasing volumes. The company delivered 486,532 vehicles, a 2.1% year-over-year decrease, but ended the quarter with the largest passenger vehicle backlog in four years. Revenue from services and other segments grew 33% to $4.61 billion, marking a record gross profit of $734 million. In contrast, energy generation and storage revenue fell 16% to $2.88 billion, partly due to tariff-related refunds, despite a 10% increase in deployments.

Capital spending reached $4.73 billion, more than double the $2.25 billion spent a year ago. This heavy investment pushed free cash flow to $1.53 billion, down from $3.99 billion in the prior year period. Tesla exited the quarter with $45.4 billion in cash and investments. The company’s full-year capital expenditure guidance of over $25 billion appears at risk, as spending through the first nine months has only reached $13.01 billion. To meet that target, Tesla would need to spend roughly $12 billion in the fourth quarter alone.

Shareholders are watching closely as the company navigates these shifts. While some investors remain skeptical about the pace of growth relative to the stock's valuation, management is focused on its long-term bets. The full shareholder deck is available on the company’s investor relations site. Management is scheduled to discuss these results and answer questions on the earnings call later today.

The key question for the coming months is whether Tesla can sustain its margin recovery while managing the massive capital requirements for its new initiatives. The fourth quarter will be critical in determining if the company can accelerate spending to meet its annual targets or if the 2026 plan is shifting toward 2027.