Tesla's AI Spending Decimates Profits Even as Margins Recover
Operating income plunged 56% year-over-year to $718 million as capital expenditures more than doubled, despite a rebound in automotive gross margins.
By Ji-eun Choi ·
Tesla’s operating income collapsed by 56% year-over-year to $718 million in the third quarter, a sharp decline driven by aggressive spending on artificial intelligence and its Optimus robot program. While the company managed to reverse a previous downward trend in margins, the bottom line still contracted significantly as investment outpaced revenue growth. This stands in contrast to the modest recovery seen in gross profit, which was not enough to offset the surging operational costs.
The trajectory of the company’s profitability has been turbulent over the past year. After posting a healthy 5.8% operating margin in the third quarter of 2025, Tesla saw that figure dip to 1.4% in the second quarter of 2026. The latest report shows a partial recovery to a 2.6% operating margin, yet the absolute dollar amount of operating income remains far below last year’s levels. Meanwhile, total gross margin improved to 19.6%, up from 18.0% a year ago, signaling that the core business is stabilizing even as the investment phase intensifies.
The primary driver of the profit squeeze was a massive increase in operating expenses, which rose 39% to $4.78 billion. Research and development costs alone jumped 69% to $2.76 billion, reflecting heavy investment in what Tesla now terms "Super Intelligence," the Optimus humanoid, and the Cybercab. Capital spending also more than doubled year-over-year to $4.73 billion, pushing the first nine months of 2026 to $13.01 billion. This pace falls short of management’s annual guidance of over $25 billion, suggesting a potential need for a historic spending surge in the final quarter.
On the revenue side, Tesla reported $28.05 billion, essentially flat with the prior year and in line with Wall Street expectations. However, the composition of that revenue tells a mixed story. Energy generation and storage revenue fell 16% to $2.88 billion, partly due to tariff-related refunds, even as deployments increased. Conversely, services and other revenue grew 33% to $4.61 billion, with gross profit in that segment hitting a record high. Automotive gross margin excluding regulatory credits rebounded to 18.1%, aided by a better product mix and higher FSD subscription revenue, though average selling prices continued to decline.
Management attributes the flat vehicle deliveries, which fell 2.1% year-over-year, to battery availability rather than weak demand. The company claims to hold the largest passenger vehicle backlog in four years. To support this narrative, Tesla reported that active FSD subscriptions reached 1.74 million, up 67%, while its Robotaxi service accumulated nearly 2 million unsupervised miles. Despite these autonomy milestones, the company ended the quarter with $45.4 billion in cash and investments, and free cash flow of $1.53 billion, down from $3.99 billion a year ago.
Looking ahead, Tesla must reconcile its ambitious spending plans with its current capital expenditure rate. With $12 billion still needed to meet the 2026 capex target, the fourth quarter will be critical. Investors will be watching whether the surge in AI and robot spending begins to yield returns, or if the profit slide continues into next year. The earnings call, scheduled for 5:30 p.m. ET, will provide management’s latest perspective on these challenges.
Source: Electrek
