Tesla profits dip despite improved margins

Tesla’s operating income fell by 56 percent in the third quarter of 2026, marking a significant decline even as the company’s core manufacturing margins showed signs of recovery. The drop occurred because spending on artificial intelligence and new vehicle projects grew much faster than the profit generated by selling cars.

The company reported revenue of $28.05 billion, which matched Wall Street expectations and remained flat compared to the same period last year. Non-GAAP earnings came in at $0.48 per share, a figure that beat the $0.45 consensus estimate. However, this result still represented a four percent decrease from the $0.50 per share earned a year ago. The improvement over the previous quarter is notable, as operating margins had fallen to just 1.4 percent in the second quarter.

Automotive gross margins excluding regulatory credits rose to 18.1 percent, up from 16.3 percent in the prior quarter. This increase was attributed to a better mix of regional sales and product types, along with more revenue from Full Self-Driving subscriptions. Despite this, average selling prices continued to fall. Regulatory credits contributed only $113 million to the bottom line, a sharp drop from $417 million in the previous year.

The energy storage segment faced headwinds, with revenue declining 16 percent to $2.88 billion. Tesla cited tariff-related customer refunds as a partial cause, even though battery deployments actually increased. In contrast, the services division performed well, seeing revenue grow by 33 percent to $4.61 billion and achieving a record gross profit of $734 million.

Management stated that battery availability was the primary factor limiting vehicle production and sales. The company ended the quarter with its largest passenger vehicle backlog in four years. Deliveries totaled 486,532 units, down 2.1 percent from last year but well above analyst forecasts. The company also reported that active Full Self-Driving subscriptions reached 1.74 million, a 67 percent increase.

Capital spending hit $4.73 billion, more than double the amount spent in the same quarter last year. This heavy investment leaves Tesla needing to spend roughly $12 billion in the fourth quarter to meet its annual guidance of over $25 billion. If the company does not significantly increase spending in the coming months, the 2026 investment plan may slip into next year.

Free cash flow stood at $1.53 billion, a substantial improvement from the negative $1.09 billion recorded in the previous quarter. The company holds $45.4 billion in cash and investments. GAAP net income dropped 43 percent to $787 million, a figure that included a $288 million unrealized gain on bitcoin holdings.