Tesla Trims Margins as AI Spending Drags Profit Down

Tesla posted third-quarter results Wednesday that showed a rebound in automotive gross margins but a continued slide in overall profitability, as spending on artificial intelligence and robotics projects rose much faster than gross profit. The company reported revenue of $28.05 billion, flat against the same quarter a year ago and matching analyst expectations. Earnings per share on a non-GAAP basis came in at $0.48, topping the $0.45 consensus, though still down 4% from $0.50 a year prior.

The quarter's timeline reveals the tension between improved car-making economics and heavy investment in new initiatives. Total gross margin rose to 19.6%, and automotive gross margin excluding regulatory credits climbed to 18.1%, up from 16.3% in the prior quarter. However, operating income fell 56% to $718 million. Operating expenses increased 39% to $4.78 billion, driven by a 69% jump in research and development spending to $2.76 billion for projects including 'Super Intelligence', Optimus, and the Cybercab. On a GAAP basis, net income declined 43% to $787 million.

The company delivered 486,532 vehicles during the period, down 2.1% from a year ago but ahead of expectations, while production totaled 464,391 units. Tesla stated that battery availability remained the limiting factor for increasing volumes, noting a four-year backlog for passenger vehicles. Deliveries exceeded production by 22,141 units, reducing inventory to 11 days of supply from 15 in the second quarter. Average selling prices continued to decline. Energy generation and storage revenue dropped 16% to $2.88 billion, which the company attributed partly to tariff-related refunds, though deployments rose to 13.7 GWh. Services and other revenue grew 33% to $4.61 billion, with gross profit reaching a record $734 million.

Capital spending reached $4.73 billion in the quarter, more than double the $2.25 billion spent a year earlier, bringing the total for the first nine months of 2026 to $13.01 billion. This figure is roughly half of the more than $25 billion management guided for the full year, implying spending near $12 billion in the fourth quarter alone. Free cash flow came in at $1.53 billion, compared with $3.99 billion a year ago and negative $1.09 billion in the prior quarter. The company ended the period with $45.4 billion in cash and investments.

Tesla reported that active Full Self-Driving subscriptions reached 1.74 million, up 67%, and that its Robotaxi service reached nearly 2 million cumulative unsupervised miles by the end of the quarter. Management did not update the full-year capital expenditure guidance in the shareholder letter. The earnings call with management is scheduled for 5:30 p.m. ET.