Tesla Q3 Profit Slides Despite Margin Recovery
The electric vehicle maker reported flat revenue and a sharp drop in operating income, citing heavy spending on AI and battery constraints.
By Fatima Zayed ·
Tesla’s third-quarter report showed a company trying to balance shrinking profits with a massive push into artificial intelligence and robotics.
The electric vehicle manufacturer released its financial results after the market closed on Tuesday. Revenue stood at $28.05 billion, essentially matching Wall Street expectations and remaining flat compared to the same period last year. While the top line held steady, the bottom line took a hit. Non-GAAP earnings came in at $0.48 per share, beating analyst estimates but dropping 4% from a year ago. On a GAAP basis, net income fell 43% to $787 million.
The pressure on profits stems from increased spending rather than weak sales. Operating income plunged 56% year-over-year to $718 million. This decline is largely attributed to a 39% jump in operating expenses, driven by heavy investment in what Tesla calls Super Intelligence, the Optimus robot, and the Cybercab. Research and development costs surged 69% to $2.76 billion. Additionally, stock-based compensation rose to $1.17 billion, including the CEO’s 2025 pay package.
Margins have shown signs of stabilization. Total gross margin improved to 19.6%, up from 16.8% in the second quarter. Auto gross margin excluding regulatory credits recovered to 18.1%, aided by a better product mix and higher subscription revenue for Full Self-Driving software. However, regulatory credits contributed only $113 million, a 73% drop from last year, as the market for those incentives has largely dried up.
Capital spending remains a significant focus, with $4.73 billion invested in the quarter. This amount is more than double the spending from a year ago. Despite this outlay, free cash flow remained positive at $1.53 billion. Tesla ended the quarter with $45.4 billion in cash and investments. However, the company has only spent about half of its guided over-$25 billion for the full year, raising questions about whether the remaining spending will be front-loaded in the final quarter.
Vehicle deliveries totaled 486,532 units, down 2.1% year-over-year. Management stated that battery availability continued to limit production volumes. The company reported a four-year high in passenger vehicle backlog. Meanwhile, energy storage deployments rose 10% to 13.7 GWh, but revenue in that segment fell 16% to $2.88 billion due to tariff-related refunds. The energy segment’s gross margin did improve significantly to 33% from 20% in the previous quarter.
The services division performed well, with revenue growing 33% to $4.61 billion. This segment achieved a record gross profit of $734 million, driven by sales in charging, insurance, and parts. Tesla also noted that active Full Self-Driving subscriptions reached 1.74 million, a 67% increase. The Robotaxi service accumulated nearly 2 million unsupervised miles by the end of the quarter.
Average selling prices continued to decline, a trend that contrasts with the reported supply constraints. Inventory levels dropped to 11 days of supply from 15 in the second quarter. Tesla delivered more vehicles than it built, drawing down stock. The full shareholder deck is available on the company’s investor relations site, and management discussed the results during an earnings call held at 5:30 p.m. ET.
Source: Electrek
