Tesla Profits Fall as AI Spending Jumps

Operating income fell 56% to $718 million, marking a significant drop in the company's earnings power. This figure represents a shift from the 5.8% operating margin posted a year ago, though it is an improvement over the 1.4% margin seen in the prior quarter. The decline in profit came despite a stabilization in overall revenue, which was reported at $28.05 billion, flat compared to the same period last year.

The shortfall in earnings is tied directly to a surge in spending. Operating expenses climbed 39% year-over-year to reach $4.78 billion, driven largely by research and development. R&D costs jumped 69% to $2.76 billion as the company invested in its Super Intelligence, Optimus, and Cybercab programs. Additionally, stock-based compensation reached $1.17 billion, rising from $663 million in the previous year.

Despite the lower bottom-line results, certain financial metrics showed signs of recovery. Total gross margin rose to 19.6%, a gain of 160 basis points from a year ago. Automotive gross margin, excluding regulatory credits, climbed to 18.1%, up from 16.3% in the second quarter. The company attributes this improvement to a better mix of vehicles and regions, as well as increased revenue from Full Self-Driving subscriptions.

The company reported that battery availability remained the limiting factor for increasing vehicle volumes. It stated that it ended the quarter with the largest backlog for passenger vehicles in four years. Deliveries for the quarter totaled 486,532 vehicles, which was a decrease of 2.1% year-over-year, while production stood at 464,391 units.

Capital spending for the quarter was $4.73 billion, more than double the $2.25 billion spent a year prior. For the first nine months of the year, capital expenditure has reached $13.01 billion against a full-year guidance of more than $25 billion. Free cash flow was reported at $1.53 billion, compared to $3.99 billion in the same quarter last year.

The energy generation and storage segment saw revenue decline 16% to $2.88 billion, though gross margin for the sector increased to 33%. Conversely, services and other revenue grew 33% to $4.61 billion. The company reported gross profit of $734 million in services, driven by charging, insurance, and parts sales.

Autonomy metrics continue to show growth, with active Full Self-Driving subscriptions reaching 1.74 million, an increase of 67%. The Robotaxi service has accumulated nearly 2 million unsupervised miles. GAAP net income for the quarter was $787 million, or $0.22 per share, down 43% year-over-year.

The company ended the quarter holding $45.4 billion in cash and investments. Management will discuss these results and the outlook on a conference call scheduled for 5:30 p.m. ET. No update was provided regarding the capital expenditure guidance for the remainder of the year.