Tesla's profit struggles continue despite margin recovery

The central tension in Tesla's latest financial report is a battle between improving product profitability and exploding operational costs. While the company managed to lift its core car margins, the bottom line still shrank significantly because of massive investments in artificial intelligence and robotics. This divergence creates a complex picture for investors who are trying to determine if the company has finally stabilized its financial footing.

Tesla reported third-quarter revenue of $28.05 billion, which was nearly identical to the figure from a year ago and aligned with Wall Street expectations. Non-GAAP earnings per share came in at $0.48, slightly beating the consensus estimate of $0.45 but still down from $0.50 in the same period last year. This marks a modest improvement from the previous quarter, when margins had dipped sharply, but the long-term trend of declining profits has not yet reversed.

The recovery in margins was visible in the automotive segment. Gross margin excluding regulatory credits rose to 18.1%, up from 16.3% in the second quarter. The company attributed this improvement to a better mix of vehicles sold and increased revenue from Full Self-Driving subscriptions. However, total operating income fell 56% year over year to $718 million. This drop occurred because operating expenses surged 39% to $4.78 billion, driven largely by a 69% jump in research and development costs for projects like Optimus and the Cybercab.

Capital spending remains a major point of uncertainty. Tesla spent $4.73 billion on capital projects this quarter, more than double the amount spent a year ago. Through the first nine months of 2026, total capital expenditure reached $13.01 billion. Management had previously guided for more than $25 billion in annual spending, meaning the company would need to spend roughly $12 billion in the final quarter alone to meet that target. The shareholder letter did not update this guidance, leaving open the question of whether the plan is slipping into next year.

Tesla also shifted the blame for flat sales from weak demand to supply chain issues. The company stated that battery availability was the limiting factor for vehicle production. Despite this claim, average selling prices continued to fall, which is atypical for a manufacturer constrained by supply. Deliveries declined 2% year over year, with the non-core models like the Cybertruck and Semi seeing a sharp 48% drop.

The energy division presented a mixed bag. Revenue fell 16% to $2.88 billion due to customer refunds related to tariffs, even though deployment volumes increased. Conversely, the services and other segment was a bright spot, with revenue growing 33% to $4.61 billion and gross profit hitting a record high. This growth was driven by charging, insurance, and parts sales.

On the technology front, active Full Self-Driving subscriptions reached 1.74 million, a 67% increase. The company noted that this count includes upfront purchases, a definition aligned with the CEO's compensation package. The Robotaxi service also expanded, reaching nearly 2 million cumulative unsupervised miles by the end of the quarter.

Free cash flow stood at $1.53 billion, a significant improvement from the negative figure in the previous quarter. This positive cash flow was partly boosted by lower spending than previously anticipated and a $288 million unrealized gain on bitcoin holdings. However, this gain was partially offset by a loss on the company's investment in SpaceX.

The key takeaway is that while Tesla's core car business is becoming more profitable, the company is burning cash to build its future. Investors must now watch whether the fourth quarter spending spike justifies the current valuation or if the 2026 capital plan is quietly being extended.