Tesla Q3: Margins Climb, Earnings Slide

Tesla reported third quarter financial results on October 21, 2026, showing a rebound in gross margins alongside a significant drop in operating income.

The electric vehicle maker posted revenue of $28.05 billion, a figure that was flat compared to the same period last year. Non-GAAP earnings reached $0.48 per share, surpassing the analyst consensus of $0.45, though still down 4% from the $0.50 recorded a year ago. On a GAAP basis, net income fell 43% to $787 million, or $0.22 per share.

Total gross margin for the quarter stood at 19.6%, an increase of 160 basis points from 18.0% a year prior and up from 16.8% in the second quarter. Automotive gross margin excluding regulatory credits reached 18.1%, rising from 16.3% in the previous quarter. Tesla attributed this improvement to a better regional and product mix as well as increased revenue from Full Self-Driving subscriptions, which was partially offset by lower average selling prices. Regulatory credit revenue declined to $113 million, a 73% drop from $417 million a year ago.

Despite the margin gains, operating income fell 56% to $718 million, resulting in an operating margin of 2.6%. This compares with 5.8% a year earlier and 1.4% in the second quarter. The company cited a 39% rise in operating expenses to $4.78 billion, driven by a 69% jump in research and development spending to $2.76 billion. This increased spending supports the company's initiatives in Super Intelligence, Optimus, and the Cybercab. Capital spending for the quarter was $4.73 billion, more than double the $2.25 billion spent a year ago.

Tesla's free cash flow for the period was $1.53 billion, a reversal from the negative $1.09 billion in the prior quarter but down from $3.99 billion a year earlier. Capital expenditures have totaled $13.01 billion for the first nine months of the year, falling short of the company's guidance for more than $25 billion in spending for 2026. The company concluded the quarter with $45.4 billion in cash and investments. GAAP net income included a $288 million unrealized gain on bitcoin holdings, offset by a $142 million unrealized loss on its SpaceX equity investment.

Deliveries for the quarter totaled 486,532 vehicles, a 2.1% decline from the previous year, while production was 464,391. The company stated that battery availability continued to be the limiting factor for increasing auto volumes, and it ended the quarter with the largest backlog for passenger vehicles in four years. Average selling prices continued to decline during the period.

Energy generation and storage revenue decreased 16% to $2.88 billion, which the company partly attributed to tariff-related customer refunds, even as deployments rose 10% to 13.7 GWh. Services and other revenue grew 33% to $4.61 billion, with gross profit for that segment reaching a record $734 million on charging, insurance, and parts sales.

In related business areas, Tesla reported that active Full Self-Driving subscriptions reached 1.74 million, an increase of 67%, a count that includes upfront purchases as defined in the 2025 CEO pay package. The Robotaxi service accumulated nearly 2 million cumulative unsupervised miles by the end of the quarter. Management scheduled an earnings call to discuss the results at 5:30 p.m. ET.