Tesla Beats on Free Cash Flow, Margins Improve; CapEx Doubles for AI Push

Tesla (TSLA) delivered a headline earnings beat for the third quarter, but the details reveal a story of deferred spending and rising costs as the company pours capital into artificial intelligence and autonomous technology.

According to ZeroHedge, which reported the results after Wednesday's close, adjusted earnings per share came in at $0.48, beating the Bloomberg consensus of $0.44. Revenue of $28.05 billion was flat year-over-year and in line with estimates. The standout number was free cash flow: $1.53 billion, versus a consensus estimate of negative $4.99 billion — a swing of roughly $6.5 billion.

**The CapEx Gap**

The free cash flow beat was not entirely organic. Capital expenditures totaled $4.73 billion in Q3, more than double the $2.25 billion from a year ago but well below the $5.79 billion spent in Q2 and $3 billion short of the $7.77 billion consensus compiled by Tesla itself. That consensus had implied free cash flow of negative $4.51 billion.

In effect, roughly half of the free cash flow "beat" came from spending that Tesla chose not to make in the quarter, ZeroHedge noted. The company's full-year CapEx target of $25 billion, set by CEO Elon Musk in April, now appears stretched. With $13 billion spent through September, hitting that target would require about $12 billion in Q4 alone — roughly 2.5 times Q3's level.

**Margins Improve, but Operating Profit Shrinks**

The brighter spot was on gross margins. Total gross margin rose to 19.6% from 18.0% a year ago and 16.8% in Q2. Automotive gross margin excluding regulatory credits — the metric most closely watched by analysts — rebounded to 18.1% from 16.3% in Q2 and 15.4% a year ago. Tesla attributed the improvement to better regional and product mix and higher Full Self-Driving subscription revenue, partly offset by lower average selling prices.

Below the gross profit line, however, the picture darkened. Operating expenses jumped 39% year-over-year to $4.78 billion, with research and development spending up 69% to $2.76 billion. Stock-based compensation, which now includes Elon Musk's 2025 pay package, rose to $1.17 billion from $663 million a year ago. As a result, operating income fell 56% to $718 million, yielding an operating margin of just 2.6% — up from the dismal 1.4% in Q2 but well below the 5.8% reported a year ago.

GAAP net income dropped 43% to $787 million, or $0.22 per share. That figure included a $288 million unrealized gain on Tesla's bitcoin holdings, partly offset by a $142 million unrealized loss on its SpaceX stake.

**Energy Slips, Services Shines**

Regulatory credit revenue — once a significant profit contributor — shrank 73% year-over-year to just $113 million, as automakers no longer face federal fuel-economy penalties.

Energy generation and storage revenue fell 16% to $2.88 billion, which Tesla blamed on tariff-related customer refunds, even as deployments rose 10% to 13.7 GWh — still short of the roughly 15.9 GWh analysts expected. Segment gross margin jumped to 33% from 20% in Q2.

Services and other revenue was the strongest performer, rising 33% to $4.61 billion, with record gross profit of $734 million.

**Autonomy and the Robotaxi Push**

Tesla's autonomy business continued to scale. Active FSD subscriptions reached 1.74 million, up 67% year-over-year, though ZeroHedge noted that count includes upfront purchases as defined in Musk's pay package. The company's robotaxi fleet crossed roughly 2 million cumulative unsupervised miles, a month after the Cybercab joined the Austin fleet.

**The SpaceX Factor**

Despite the headline beat, Tesla's stock reaction was muted. Shares closed up 3.4% at $386.47 and added about 1% in after-hours trading, reaching three-month highs. ZeroHedge attributed the limited enthusiasm to a separate development: one day earlier, SpaceX reported a blowout quarter and Musk confirmed that both companies have formed special committees to discuss a potential merger. As Goldman's consumer desk noted, such a combination would be the largest corporate merger ever. No terms have been settled, and Musk cautioned that Tesla shareholder support may be uncertain.

Tesla ended the quarter with $45.4 billion in cash and investments, providing a cushion for its ambitious spending plans — if the $25 billion CapEx target remains in place.