Tesla margins recover, profit slides

Wall Street anticipated a flat performance for Tesla’s third quarter, with analysts expecting revenue near $28 billion and a slight dip in earnings per share. The company’s latest financial report, released after market close, confirmed those baseline expectations while revealing a mixed picture of margin recovery and significant cost increases.

Revenue landed at $28.05 billion, essentially matching the prior year and the consensus estimate of $28.06 billion. Non-GAAP earnings per share came in at $0.48, beating the expected $0.45 but down 4% from the $0.50 recorded a year ago. This result marks an improvement over the second quarter, where margins had compressed severely and earnings missed expectations by a wide margin.

Total gross margin improved to 19.6%, up from 18.0% in the same period last year and well above the 16.8% seen in the previous quarter. However, operating income fell 56% to $718 million, resulting in an operating margin of 2.6% compared to 5.8% a year earlier. GAAP net income dropped 43% to $787 million, or $0.22 per share, a figure influenced by a $288 million unrealized gain on bitcoin holdings and a $142 million unrealized loss on its SpaceX investment.

The profit decline is driven by aggressive spending on future technologies. Operating expenses rose 39% year-over-year to $4.78 billion, with research and development costs jumping 69% to $2.76 billion as the company invests in its Super Intelligence, Optimus robot, and Cybercab projects. Capital expenditure for the quarter reached $4.73 billion, more than double the amount spent a year ago, though this was lower than the $5.79 billion spent in the second quarter.

Automotive gross margin excluding regulatory credits recovered to 18.1%, up from 16.3% in the second quarter, aided by a better product mix and FSD subscription revenue. In contrast, the energy segment saw revenue fall 16% to $2.88 billion due to tariff-related refunds, despite a 10% increase in deployments. Services and other revenue grew 33% to $4.61 billion, with gross profit hitting a record high as charging, insurance, and parts sales expanded.

Management attributes flat vehicle volumes to battery availability rather than weak demand, noting that the company ended the quarter with the largest passenger vehicle backlog in four years. Active FSD subscriptions reached 1.74 million, a 67% increase, while the robotaxi service accumulated nearly 2 million unsupervised miles. With year-to-date capital spending at $13.01 billion against a guidance of over $25 billion, Tesla would need to spend roughly $12 billion in the fourth quarter to meet its annual target, a figure that may push the full plan into 2027.