Tesla Profits Drop, But Car Profit Margins Are Back Up

Operating income for Tesla fell 56% year-over-year to $718 million in the third quarter of 2026, marking a continued decline in profitability despite a recovery in manufacturing margins. While the company’s ability to generate profit from its core vehicle business has improved, spending on artificial intelligence and robotics development has outpaced the gains made in gross profit. Tesla released these financial results and its shareholders' letter after the market closed on October 21, with an earnings call scheduled for later that evening.

The automotive gross margin excluding regulatory credits, a key metric for understanding vehicle profitability, climbed to 18.1%. This figure represents a significant improvement from the 16.3% recorded in the second quarter and is up from 15.4% a year ago. The company attributed this recovery to a better mix of products and regions, as well as increased revenue from Full Self-Driving subscriptions. However, average selling prices for vehicles continued to trend downward.

Despite the improvement in vehicle margins, total operating expenses for the quarter surged 39% to reach $4.78 billion. Research and development spending alone increased by 69% to $2.76 billion, driven by investments in what the company calls Super Intelligence, Optimus, and the Cybercab. Additionally, stock-based compensation costs, which include the 2025 CEO pay package, rose to $1.17 billion from $663 million in the previous year.

Capital spending for the third quarter was $4.73 billion, more than double the $2.25 billion spent during the same period last year. However, cumulative spending for the first nine months of 2026 stands at $13.01 billion, which is only half of the more than $25 billion the company projected for the full year. To reach that annual target, the company would need to spend approximately $12 billion in the fourth quarter alone, a figure more than double its highest spending quarter to date.

Regarding vehicle production and delivery, the company delivered 486,532 vehicles in the quarter, a 2.1% decrease year-over-year. The company stated that battery availability remained the limiting factor in increasing vehicle volumes and reported that it ended the quarter with its largest passenger vehicle backlog in four years. Consequently, the company delivered 22,141 more cars than it built, reducing inventory levels to 11 days of supply.

The energy segment saw revenue decline 16% to $2.88 billion, which the company partly attributed to tariff-related customer refunds. Energy generation and storage deployments rose 10% to 13.7 GWh, though gross profit for the segment slipped to $954 million from $1.07 billion a year ago. Conversely, services and other revenue grew 33% to $4.61 billion, with the company reporting a record gross profit of $734 million in this area.

On the technology front, active Full Self-Driving subscriptions reached 1.74 million, a 67% increase. This count includes upfront purchases as defined in the 2025 CEO pay package. The company's Robotaxi service reached nearly 2 million cumulative unsupervised miles by the end of the quarter, following the addition of the Cybercab to the Austin fleet.

Tesla reported $28.05 billion in revenue for the quarter, which was flat compared to the previous year and aligned with analyst expectations. Non-GAAP earnings per share came in at $0.48, beating the consensus estimate of $0.45 but falling 4% from the $0.50 reported a year ago. On a GAAP basis, net income dropped 43% to $787 million, or $0.22 per share.

The company ended the quarter with $45.4 billion in cash and investments. Free cash flow stood at $1.53 billion, a decline from the $3.99 billion reported a year ago but an improvement over the negative $1.09 billion seen in the second quarter. The earnings call to discuss these results was scheduled for 5:30 p.m. ET.