Tesla Profitability: Margins Recover as AI Spending Soars

Tesla Inc. reported that its third-quarter operating income dropped by more than half, a decline driven by aggressive spending on artificial intelligence and new hardware, even as the company’s core automotive profitability showed signs of stabilization. The tension between recovering margins and ballooning expenses defines the latest financial snapshot from the electric vehicle maker.

Revenue held steady at $28.05 billion, aligning with Wall Street forecasts and remaining flat compared to the same period last year. However, the bottom line tells a more complex story. GAAP net income fell 43% to $787 million, or $0.22 per share. On a non-GAAP basis, earnings per share were $0.48, beating the $0.45 consensus estimate but still down 4% from the prior year.

The recovery in automotive performance is evident in gross margins. Excluding regulatory credits, auto gross margin rose to 18.1%, up from 15.4% a year ago and 16.3% in the second quarter. Tesla attributed this improvement to a better regional and product mix, along with increased revenue from Full Self-Driving subscriptions. Despite this, operating income fell 56% to $718 million, resulting in an operating margin of 2.6%, compared to 5.8% in the same quarter last year.

Spending on research and development surged 69% to $2.76 billion, fueled by projects including the Optimus robot, the Cybercab, and what the company now terms “Super Intelligence.” Total capital expenditure reached $4.73 billion, more than double the figure from a year ago. This heavy investment pace has left Tesla with $13.01 billion in capital spending for the first nine months, roughly half of its full-year guidance, suggesting a potential surge in fourth-quarter spending or a slip into 2027.

Vehicle deliveries totaled 486,532, a 2.1% year-over-year decrease, though ahead of analyst expectations. Tesla cited battery availability as the primary constraint on volume, noting the largest passenger vehicle backlog in four years. Meanwhile, the energy segment faced headwinds, with revenue falling 16% to $2.88 billion due to tariff-related refunds, despite a 10% increase in storage deployments. Services and other revenue grew 33% to $4.61 billion, marking a record gross profit for that division.

As of the end of the quarter, Tesla held $45.4 billion in cash and investments. Active FSD subscriptions reached 1.74 million, a 67% increase, while the Robotaxi service accumulated nearly 2 million unsupervised miles. Management will discuss these results and the path forward on an earnings call scheduled for 5:30 p.m. ET.