Tesla Profit Falls 43 Percent as Margins Recover and Merger Review Looms
Tesla said its third-quarter adjusted earnings per share came to $0.48, beating market expectations of $0.43 to $0.45, when it reported results after the close on Oct. 21. According to Electrek, adjusted EPS fell 4 percent from $0.50 a year earlier. Revenue was $28.05 billion, roughly flat from a year earlier and slightly above the LSEG consensus of $27.88 billion compiled by Reuters.
The quarter was defined by a contrast between recovering margins and surging costs. Automotive gross margin excluding regulatory credits rose to 18.1 percent, up sharply from 15.4 percent a year earlier and 16.3 percent in the second quarter. Overall gross margin reached 19.6 percent, rebounding from 16.8 percent in the second quarter, Electrek reported. But operating income plunged 56 percent from a year earlier to $718 million, and operating margin fell to 2.6 percent from 5.8 percent.
Artificial intelligence and robots sat at the center of the cost surge. Operating expenses rose 39 percent from a year earlier to $4.78 billion, with research and development spending alone jumping 69 percent to $2.76 billion. Investment in the AI business Tesla calls Super Intelligence, the Optimus robot and the Cybercab outpaced the growth in gross profit. Stock-based compensation, including the 2025 CEO pay package, was $1.17 billion. Net income under generally accepted accounting principles was $787 million, or $0.22 a share, down 43 percent from a year earlier.
Cash flow defied Wall Street's pessimistic outlook. Free cash flow was $1.531 billion, far from the roughly $4.5 billion negative figure the market had expected. Capital spending was $4.732 billion, below expectations of more than $7.5 billion, according to ZeroHedge and TradingKey. Cash and short-term investments stood at $45.4 billion at the end of the quarter. TradingKey pointed to the other side of the beat, noting that spending came in about $3 billion below expectations.
On the earnings call, Tesla lowered its full-year capital spending guidance to about $20 billion from a previous $25 billion. Chief Financial Officer Vaibhav Taneja said the reduction came from managing capital deployment efficiently, and that the company plans to fund its spending primarily from operating cash flow, Yahoo Finance reported. Musk said capital spending is coming in somewhat lower than expected this year but will grow more meaningful next year and reach the tens of billions of dollars in 2028. The spending is directed at Optimus production lines, AI computing, the Cybercab ramp and Terafab, the chip plant Tesla is building with SpaceX. Tesla also plans to bring its AI training compute capacity to 400 megawatts by the end of the year, Yahoo Finance reported.
Vehicle sales showed signs of recovery. Third-quarter deliveries totaled 486,532, down 2 percent from a year earlier but above Wall Street's estimate of about 461,100, Reuters reported. Production rose 4 percent to 464,391. The Model 3 and Model Y accounted for nearly all of it, while other models including the Cybertruck fell to 8,295 from 12,364 in the second quarter. Tesla said it had ended Model S and Model X production at its Fremont factory and would install its first large-scale Optimus production line in their place. The company said it produced and delivered its 10 millionth vehicle during the quarter and secured its largest order backlog in four years. Canada, Australia, Japan and Taiwan set quarterly delivery records.
The energy business was mixed. Energy storage deployments reached 13.7 gigawatt-hours, up 10 percent from a year earlier, and the company said its Texas Megafactory had begun operating, targeting an annual capacity of 50 GWh. The pace of incoming orders and the backlog were both at record highs. But energy revenue fell 16 percent from a year earlier to $2.881 billion. Services and other revenue rose 33 percent to $4.605 billion, producing a record $734 million in gross profit. Revenue from regulatory credits plunged to $113 million from $417 million a year earlier.
Self-driving was the brightest part of the report. Active Full Self-Driving subscriptions reached 1.74 million, up 67 percent, and more than 75 percent of new vehicles delivered in North America included FSD. Since the end of the second quarter, Croatia, Slovenia, the Czech Republic and Slovakia approved FSD, bringing the number of approved European countries to nine. The Cybercab, which began commercial service in Austin on Sept. 3, has grown its fleet tenfold since launch, and robotaxi miles are increasing "very rapidly on a weekly basis," Chief Executive Elon Musk said. Still, the National Highway Traffic Safety Administration has issued a special order with 21 requests examining how Tesla self-certified compliance with safety standards, and the company must respond by Oct. 30. Tesla also said it began production of the Semi electric truck at its Nevada factory in the third quarter.
Production of the Optimus humanoid robot has begun at the Fremont factory. The company said it had "proved that the current manufacturing process is suitable for a commercial product," but Musk urged investors to temper expectations. A robot built from 10,000 parts can ramp only at the speed of its slowest component, he said, and reaching a production rate of 20,000 units a week is expected to take a year. Deliveries of Optimus to companies outside Tesla are expected around the end of 2027, Shacknews reported, citing the earnings call. Musk said the climb to that pace would take at least a year, and perhaps a little longer. He also said Tesla could release a demonstration video of Optimus within about a month, emphasizing that the robot's movements would not be choreographed in advance, Yahoo Finance reported.
Investor attention is fixed as much on a possible SpaceX merger as on the results. On SpaceX's earnings call on Oct. 20, Musk said the boards of SpaceX and Tesla had each formed special committees of independent directors, at the request of shareholders, to review a possible merger. Musk said neither side had agreed to any transaction terms and there was no guarantee an agreement would be reached, adding that treating the merger as a done deal would be an overstatement, according to CNN and The Wall Street Journal.
As the chief executive of both companies, Musk is a conflicted party who cannot take part in the committees' discussions, and he described the situation as like tap-dancing across a minefield. The bar for approval is also high. A merger would require the support of a majority of all outstanding Tesla shares, a threshold Musk called a "high hurdle." The logic he cited for combining the companies rests on collaboration in superintelligence software, chip design, robotics and communications, and includes Terafab, the AI chip plant being pursued jointly by SpaceX, Tesla and Intel. Terafab is targeting chip production at mass-production scale in 2028.
Wall Street reaction was divided. Analyst Dan Ives put the odds of a merger by the end of 2027 at 80 to 90 percent and estimated a combined company could be worth $5 trillion. RBC Capital Markets modeled a combined value of $3.74 trillion, and JPMorgan analysts said "the strategic logic is coherent," citing the engineering talent, AI infrastructure and Terafab the two companies share. Barclays analyst Dan Levy said a merger is "increasingly becoming the consensus," with an all-stock deal in which SpaceX is the acquirer the most likely structure. But no merger item appears on the agenda for Tesla's Dec. 3 shareholder meeting, AIStockWire reported. Tesla already holds Class A shares in SpaceX. A $2 billion investment commitment made in January in xAI Holdings, Musk's AI company, was converted into a SpaceX stake after xAI was folded into SpaceX, and the purchase was completed on March 12.
Tesla's post-earnings call began at 5:30 p.m. Eastern on Oct. 21. In opening remarks reported by Shacknews, Musk said the third quarter was very strong, that vehicle demand is growing quickly and that FSD is the biggest driver of that demand. He said he hoped FSD approval across Europe would come within months or during the first quarter. He also said an annual production rate of 5 million vehicles around 2030 was a target with a fairly good chance of being achieved, and that gross margins would rise meaningfully as the company heads into a period of significant growth.
Analysts had expected merger questions on the call. On the second-quarter call in July, Musk deflected a merger question by saying a merger cannot be discussed on an earnings call and that the appropriate process must be followed, handing the question to the company's general counsel. Whether he holds the same line this time, or repeats his Oct. 20 SpaceX remarks, is the point to watch.
The stock moved first on merger expectations. Tesla shares closed the regular session on Oct. 21 at $386.47, up 3.4 percent from the previous close of $373.71. Its market value is about $1.5 trillion. Shares fell 3.19 percent in after-hours trading to $374.14 as of 7:43 p.m. Eastern, Yahoo Finance reported. The 52-week range is $297.38 to $498.83.
