Tesla’s earnings remind investors that gravity still applies

Key points:

While Tesla’s share price and valuation often seem to defy gravity, its earnings remain firmly at ground level. The world’s most valuable carmaker delivered record sales in the third quarter, but profits fell sharply as price cuts, tariffs and swelling AI ambitions continued to squeeze margins. The results were a reminder that even visionary companies must obey the laws of financial physics.

The key numbers:

• Revenue: USD 28.1 billion, up around 12% year over year
• Net income: down more than 25% from last year
• Earnings per share: USD 0.50, below expectations of roughly USD 0.54
• Automotive gross margin (excl. credits): about 15%, compared with 18% a year ago
• Energy storage revenue: USD 3.4 billion, up 44% year over year
• Cash and investments: record USD 41.6 billion

Tesla’s margins have now declined for four consecutive quarters, raising questions about how long the company can afford to fund its next big transformation.

A company in transition

Tesla’s latest results capture a business in the middle of a strategic pivot. Elon Musk has redirected much of the company’s attention and resources toward “physical AI” – autonomous systems that drive, build and operate without human input. The ambition is bold, but the financial path to get there is proving far more complex.

Tesla’s vehicle business remains the cash engine, but it is under pressure. Average selling prices have dropped after a series of cuts meant to boost demand, while the costs of AI infrastructure, chip design and new product lines continue to rise. Tariffs added roughly USD 400 million in quarterly expenses, further weighing on profitability.

Operating expenses climbed nearly 50% from a year ago as Tesla expanded its AI and robotics teams. Meanwhile, income from regulatory credits – once a quiet profit booster – fell 44% to about USD 417 million, showing that an old revenue stream is steadily drying up.

Energy storage emerges as Tesla’s stabiliser

If one area stood out as a positive surprise, it was energy storage. The division, which includes Megapacks and Powerwalls, generated more than 20% of total gross profit over the past year and continues to grow rapidly. Revenue rose about 44% year over year to USD 3.4 billion, with operating margins above 30%.

This business has become Tesla’s quiet stabilizer, providing steady cash flow and offsetting some of the volatility in automotive earnings. Demand for grid-scale storage and renewable integration remains strong, and Tesla’s lead in battery technology gives it a competitive edge.

As the automotive side navigates thinner margins and heavy AI spending, energy storage is increasingly acting as the financial bridge between Tesla’s present and its future.

Strong balance sheet, rising investment needs

Despite softer earnings, Tesla’s finances remain robust. The company’s USD 41.6 billion cash pile provides flexibility to fund its AI and robotics ambitions without immediate external financing. Free cash flow improved from the previous quarter, but management signalled that capital expenditure will rise “substantially” from 2026 as production of new models, AI chips and the Optimus robot ramps up.

Sustaining those investments will depend on the company’s ability to rebuild profitability over the next few quarters.

Physical AI takes the spotlight

Much of Tesla’s narrative now revolves around its push into physical AI. Musk described the company as entering a new phase, with robotaxi operations already under way in Austin and a wider rollout of unsupervised full self-driving in select regions still ahead. Optimus, the humanoid robot, is moving toward limited production next year, with larger-scale rollout targeted for 2026.

Tesla is also developing its own AI chip architecture to support these systems, aiming for greater vertical integration. The ambition is enormous: to transform from an automaker into an AI-driven robotics platform.

But the challenge is equally large. Scaling these technologies to cash-flow-positive levels will be a multiyear effort that depends on regulatory approval, AI performance and production efficiency. Investors will need to see consistent milestones, not just big promises, before re-rating the company’s long-term potential.

The earnings call also highlighted governance tensions as Musk pushed for approval of his proposed USD one trillion pay package ahead of a 6 November vote. Supporters see it as key to keeping Musk focused on Tesla’s AI ambitions, while critics question the size and structure.

What to watch next

The next few quarters will be less about headline sales and more about execution. Key indicators to monitor include:

• Automotive margins: Can Tesla keep gross margins in the mid-teens as new models and cost efficiencies take hold?
• Energy storage growth: Continued expansion and profitability in Megapack deployments will be crucial.
• External factors: Tariffs and declining regulatory credits could weigh on margins.
• AI milestones: Real-world adoption of full self-driving and credible progress toward robotaxi operations.

Market reaction and valuation realities

Tesla’s shares slipped after the report as investors digested weaker earnings and limited near-term catalysts. The stock has already climbed more than 30% since late summer on excitement about its AI potential, leaving little room for disappointment.

The market remains divided on the stock’s potential. According to FactSet, 53 analysts currently cover Tesla, with an average rating of Hold and a consensus target price around USD 370 – roughly 16% below current levels. The distribution is wide: 18 rate the stock Buy, 17 Hold and 10 Sell.

Despite this mixed sentiment, Tesla still trades at a forward price-to-earnings ratio above 250, according to Bloomberg – far above both the broader market and its peers. The valuation shows how much of Tesla’s future is already priced in rather than current profits.

Tesla’s price reflects extraordinary faith in its ability to deliver on bold promises across autonomy, robotics and energy. But that belief looks increasingly fragile against the reality of shrinking margins and rising execution risks.

The road ahead

Tesla stands at the crossroads of energy, AI and automation, which are all industries that could define the next decade but that demand enormous capital and patience. The question for investors is whether Tesla can continue to innovate and scale new technologies while maintaining the profitability to fund them internally.

In the short term, Tesla is battling gravity. In the long term, it’s still building the rocket. For investors, that means focusing less on hype and more on hard numbers like margins, cash flow, and credible milestones in autonomy and energy storage. Tesla’s journey from electric cars to physical AI will not be linear, but the next few years will reveal whether this transformation leads to turbulence or a new phase of sustained growth.

Sources: Tesla Q3 2025 results, FactSet, Bloomberg. Data as of 23 October 2025.