Tesla (TSLA) Beats Q3 and Flips Cash Flow Positive, but AI Bill Grows

Tesla (TSLA) beat third-quarter estimates and swung free cash flow back into positive territory. The stock still slid more than 3% in extended trading Wednesday, because the bill for what Tesla wants to be next keeps getting bigger.

Adjusted earnings came in at $0.48 a share against $0.43 expected, and revenue hit $28.05 billion versus $27.9 billion, according to LSEG estimates cited by CNBC. Revenue was roughly flat from a year ago.

The mix underneath was uneven. Automotive revenue fell 3% to $20.56 billion, and energy revenue dropped 16% to $2.88 billion. Services and other was the bright spot, climbing 33% to $4.61 billion.

Tesla blamed lower average selling prices and tight battery supply for the soft auto numbers. It says it ended the quarter with its largest backlog of passenger vehicles in four years, which would be a good sign if prices weren't also drifting down.

Profitability is where the picture gets more complicated. Electrek's read of the results shows operating income fell 56% to $718 million, an operating margin of 2.6%, as spending on AI, Optimus and the Cybercab outran gross profit.

The encouraging part: auto gross margin excluding regulatory credits rebounded to 18.1% from 16.3% in the second quarter. Net income attributable to shareholders was $787 million, or $0.22 a share.

Free cash flow was $1.53 billion, after the second quarter's burn. That's down 62% from a year ago, but analysts had braced for a much uglier number. Tesla finished the quarter with $45.4 billion in cash and investments.

One caveat from Electrek: Tesla has spent about $13 billion on capex through nine months against guidance of more than $25 billion for the year. Either Q4 spending explodes, or part of the plan slips into 2027. The lighter spending also flattered this quarter's cash flow.

"I think it starts to become noticeable in Q2 and then probably a big deal by Q3 or Q4 of next year." — Elon Musk, CEO, Tesla

Musk was talking about the driverless Robotaxi fleet, which he said won't "move the needle" this quarter. Texas regulators currently authorize 362 Model Y Robotaxis and 449 Cybercabs for driverless operation.

Volume wasn't the issue. Tesla delivered 486,532 vehicles in the quarter, about 2% fewer than a year ago, though it set sales records in Canada, Japan, Taiwan and Australia. It plans to bring the Cybercab to cities beyond Austin this year, and Musk said most of that fleet will be Tesla-owned and run as a transport service.

FSD is the nearer-term lever. Active FSD (Supervised) subscriptions rose 67% from a year earlier to 1.74 million, and Tesla says the product is driving demand in markets where it's approved. It plans to give some customer cars access to FSD Unsupervised around the second quarter of next year.

The wild card sits outside the earnings deck. Musk said a day earlier that it would be a "good idea" for Tesla and SpaceX to merge, and both boards have formed special committees to discuss it. On the call, Musk said he'd already said everything that should be said.

The risks are straightforward. Margins are recovering but operating income is still falling. Chinese EV makers keep gaining ground in Asia and Europe, and the shares are down 14% this year. Musk himself said Optimus still needs a lot of work before it's useful for open-ended tasks, with the bugs solved around the end of next year.

What to watch: Q4 capex versus that $25 billion target, whether auto margins hold above 18% without credits, and any real detail from the merger committees. FSD subscriber growth is the cleanest read on whether the software story is working.

Bottom line: Tesla's old business is healing, but investors are paying for the new one, and the new one won't pay back until 2027.