Tesla Spends Billions on AI as Profit Slides

Tesla ended the third quarter with $45.4 billion in cash and investments, a financial cushion that highlights the scale of its ongoing spending spree. The company reported $28.05 billion in revenue for the period, a figure that remained flat compared to the same quarter a year ago and aligned almost perfectly with Wall Street expectations. While the top line held steady, the path to profitability grew more expensive, driven by aggressive capital expenditures and rising operating costs.

The central tension in the report is the gap between improving margins and shrinking profits. Tesla’s automotive gross margin, excluding regulatory credits, climbed to 18.1%, a significant recovery from the 16.3% recorded in the previous quarter and the 15.4% seen a year prior. However, this margin improvement was overshadowed by a 56% year-over-year drop in operating income, which fell to $718 million. Consequently, the operating margin compressed to 2.6%, down from 5.8% in the prior year, even though it represented a sharp rebound from the 1.4% low of the second quarter.

The primary driver of the profit decline was a surge in operating expenses, which rose 39% to $4.78 billion. Research and development costs jumped 69% to $2.76 billion as the company poured resources into its "Super Intelligence" initiatives, the Optimus robot, and the Cybercab. Additionally, stock-based compensation reached $1.17 billion, nearly doubling from the previous year due to the 2025 CEO pay package. Capital spending also more than doubled to $4.73 billion, reflecting the company's push to build out its future infrastructure.

This spending pattern raises questions about the company’s annual financial targets. Tesla has guided for over $25 billion in capital expenditure for the full year, but it has only committed $13.01 billion through the first nine months. To meet that target, the automaker would need to spend roughly $12 billion in the fourth quarter alone, more than double its highest previous quarterly spend. Since the third-quarter letter did not update this guidance, the company may face a choice between an explosive final quarter of spending or allowing its 2026 plans to slip into the next fiscal year.

On the revenue side, the energy segment presented a mixed picture. While deployments increased 10% to 13.7 GWh, energy revenue fell 16% to $2.88 billion, largely due to tariff-related customer refunds. The segment’s gross margin improved to 33%, yet gross profit still declined. In contrast, the services segment was a standout performer, with revenue growing 33% to $4.61 billion and gross profit hitting a record high, driven by charging, insurance, and parts sales.

Tesla attributes its flat vehicle sales primarily to supply constraints rather than weak demand. The company stated that battery availability was the limiting factor and ended the quarter with the largest passenger vehicle backlog in four years. Despite this, average selling prices continued to fall, a trend that complicates the supply-constrained narrative. Deliveries totaled 486,532 vehicles, down 2.1% year-over-year, with the "other models" category, including the Cybertruck, falling by 48%.

Looking ahead, Tesla reported that active Full Self-Driving subscriptions reached 1.74 million, a 67% increase, though this metric includes upfront purchases. The Robotaxi service accumulated nearly 2 million unsupervised miles, a milestone reached one month after the Cybercab joined the Austin fleet. As management prepares to discuss these results on the upcoming earnings call, the market will focus on how the company balances its current profitability against the massive capital required for its autonomous future.