Earnings Review: Tesla Still Stuck in a Profit Slump

Benefiting from a buying rush by U.S. consumers ahead of the expiration of government EV tax credits, $Tesla Motors(TSLA)$  's third-quarter revenue rebounded sharply and beat expectations, but pressure on profitability did not ease.

Third-quarter revenue shook off the prior quarter's double-digit slump with a double-digit year-over-year increase, while EPS fell by more than 30% year over year—worse than Wall Street had anticipated—reflecting the impact of raised tariffs under the Trump administration, increased R&D spending on new model launches and AI projects.

Core Financial Indicators

Revenue: In the third quarter, Tesla reported revenue of $28.095 billion, up 12% year over year and nearly 25% quarter over quarter, versus analysts' expectation of $26.36 billion. In the second quarter, revenue declined 12% year over year.

EPS: In the third quarter, adjusted EPS (non-GAAP) was $0.50, down 31% year over year, versus analysts' expectation of $0.54. In the second quarter, adjusted EPS fell 23% year over year.

Operating profit: In the third quarter, operating profit was $1.624 billion, down 40% year over year, versus analysts' expectation of $1.65 billion. In the second quarter, operating profit fell 42% year over year.

Net income: In the third quarter, adjusted net income was $1.77 billion, down 29% year over year; in the second quarter, it fell 23% year over year.

How it differed from expectations

On the profit side, overall gross margin beat expectations by 0.8 percentage points to 18%, but the operating margin of 5.8% fell sharply from 10.8% a year ago. This suggests Tesla's materials costs haven't changed much; the increase came from operating expenses (SG&A and R&D). Management said on the earnings call that operating expenses rose, including spending on AI and other R&D projects.

Segment Overview

Automotive: Q3 automotive revenue was $21.205 billion, up 6% year over year; in Q2 it was down 16% year over year.

Previously reported vehicle sales volume grew by 7%, but overall automotive revenue rose 6%, implying a decline in average selling price (ASP) per vehicle. This is slightly below prior expectations that the refreshed Model Y would lift the ASP.

Tesla continues to localize its battery and powertrain supply chains. It expects its lithium refining facility in Texas to come online in the fourth quarter of this year, and its LFP (lithium iron phosphate) battery production line in Nevada to begin production in the first quarter of next year. We believe this will enhance Tesla’s future supply chain security and is expected to lift its per-vehicle gross profit.

Energy Storage: Q3 energy generation and storage revenue was $3.415 billion, up 44% year over year; in Q2 it was down 7% year over year.

Services and other: The segment revenue was $3.475 billion; cost was $3.109 billion. Gross margin was 10.5%.

Business Guidance

As with the second-quarter report, Tesla again provided no guidance on production or deliveries, reiterating that it is difficult to assess the impact of tariffs and other trade policies on its supply chain, costs, and demand. Tesla said the Cybercab—the vehicle for its autonomous robotaxi—along with the newly released Megapack 3 energy storage system, are all planned to begin mass production next year.

To drive its AI ambitions, Tesla is making a bold bet on chip design. Musk gave a detailed overview of the AI5 chip, which he said he personally helped design. He revealed that Tesla will commission both Samsung and TSMC to manufacture the chip at their U.S. facilities, with the goal of creating a “surplus of AI chips.”

Musk said that by removing nonessential blocks such as conventional GPUs and image signal processors, the AI5 chip will be “40 times better” than AI4 on certain metrics, and could deliver a 2–3x improvement in energy efficiency and a 10x improvement in price-performance.

Summary

Overall, the earnings report shows revenue exceeding expectations, while profits fell short of expectations.

The variables that need to be focused on subsequently are the mass-production timelines of new products. Musk said he expects to launch Optimus 3 in the first quarter of next year, which is slightly later than the previously anticipated launch within this year.

The stock price fell by more than 3% after the earnings release.

Valuation:

Tesla's PE ratio currently exceeds 260x, placing it in the 73rd percentile over the past five years.

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