Tesla Q3 earnings: Ideas over income
Tesla may have delivered a record number of cars in the third quarter, but this did not translate to higher earnings per share or net income. Although revenues for Q3 came in above estimates at $28.09 billion, net income was $1.77 billion, below the $1.9 billion expected. This spooked a nervous market, and the share price is lower by more than 3% in after-hours trading.
Free cash flow surges, but none of it will go to investors
The highlights from this earnings report included a stronger-than-expected gross margin of 18% versus estimates of 17.2%. There was more good news: Tesla reported free cash flow that was better than analysts expected. The company generated free cash flow of $4 billion last quarter, while analysts had expected just over $1 billion. This was generated by an inventory clear-out, meaning Tesla now holds a $41.6 billion cash pile.
This is a serious chunk of change; however, there were no investor sweeteners included in this earnings report. Tesla does not pay dividends, and it has never executed a share buyback program, although it was apparently on the agenda back in 2022. Understanding why Tesla does not want to give back excess cash to shareholders requires understanding Elon Musk’s mindset.
Tesla: the company of ideas
Elon Musk said that people should think of Tesla as a dozen startup companies in one. It is a car company, a supercharger network provider, an AI powerhouse, and the home of the Robotaxi — which could take streets by storm in the coming decade. Thus, no wonder the stock price is volatile after this earnings report: anyone looking for Tesla to act like other blue chips will be disappointed. Tesla does not work on the model of sales → revenues → cash → buybacks → repeat. Instead, it is a traditional growth company that runs on ideas. If you believe in the ideas of Elon Musk, then you should buy Tesla stock; if you don’t, then you should avoid it.
The company is much more than a car manufacturer. Its energy generation and storage business saw revenues jump, and it is working with TSMC and Samsung to produce its latest AI chips.
Other snippets from this earnings report include a $400 million hit to the business from President Trump’s tariffs, growing capex spending, and higher compensation packages in its AI division as the global talent war rages on.
Holding out hope for the future
Tesla tends to give vague forward guidance, but it said that a refreshed Model Y and a new cheaper version will rejuvenate sales and make up for any weakness caused by the expiration of the EV car credit in the U.S.
If you were wondering where Tesla spends its money, a fair chunk goes to Nvidia. The company announced that it has 81,000 Nvidia H100 GPUs at its data center in Austin. These power Tesla’s AI ambitions, but such ambitions do not come cheap — operating expenses surged 50% year over year last quarter.
This suggests Musk is banking on more car sales from cheaper models, alongside AI developments, as the future revenue drivers for the company.
Robotaxi still in early rollout
There is a lot of anticipation about the Robotaxi and the potential for its self-driving technology to be a rich source of revenue growth in the future. Investors expected an update on this part of the business, and Musk mentioned that there are 20 robotaxis currently in operation in Austin, and 8–10 metro areas could be operating robotaxis by the end of this year, pending regulatory approvals. This is a start, but investors will want to see sustained growth in the rollout, and any regulatory hurdles in the coming weeks could weigh further on the share price.
A Musk-designed robot could be our future
Humanoid robots are also in development, although Musk did not disclose whether they will be turned into retail products. He said that these robots are already working in Tesla offices, showing guests around the building. This sounds expensive — and it is one of the many reasons why net income was disappointing and capex spending will continue increasing.
Would you pay for Musk’s ideas to come to life?
In the current environment, where investors remain nervous about geopolitics and the global economic outlook, the vision and ideas that Musk is selling may not take off. Although the results had pockets of strength, including car sales and energy production, the market may not be in the mood to pay to bring Musk’s ideas to life — explaining the lukewarm reception to this report.
Key test coming up for the tech sector
So far in Q3, tech earnings have disappointed investors. Netflix’s share price fell by 10% after its earnings report, and Tesla’s stock is also down more than 3% in after-hours trading. Next week’s tech earnings — which include the hyperscalers Microsoft, Amazon, Meta, and Google — will be a key market test. However, the weak reception for Netflix and Tesla suggests the bar is high: any tech company will have to pass this earnings test with flying colors as investors begin to lose patience.
Overall, this earnings report will delight the Musk and Tesla enthusiasts who may buy the dip on Thursday. But Musk likely failed to persuade the more skeptical investors — those who wish he did a bit less thinking and a lot more producing.