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Tesla Produced $1.53 Billion of Free Cash Flow and an 18.1% Automotive Margin, Cut Its 2026 Capex Plan to $20 Billion and Took No Questions on the SpaceX Merger. Operating Income Still Fell 56%
Tesla reported third-quarter revenue of $28.05 billion on October 21, flat from a year earlier and in line with consensus, with adjusted earnings of $0.48 a share against $0.45 expected. The automotive gross margin excluding regulatory credits rose to 18.1% from 16.3% in the second quarter, energy storage earned a 33% margin, and free cash flow was $1.53 billion after a $1.09 billion outflow in the second quarter. Operating income fell 56% to $718 million as research spending rose 69%. The shares, which had risen 3.41% to a three-month high of $386.47 on merger talk, fell about 2% after hours.
Tesla's quarter was better than the profit line says and worse than the stock price says. Revenue was $28.05 billion, unchanged from a year earlier and within $10 million of the consensus, on deliveries of 486,532 vehicles, down 2.1% but well above the 461,974 analysts expected, and production of 464,391. The total gross margin rose to 19.6% from 18.0% a year earlier and 16.8% in the second quarter, and the automotive gross margin excluding regulatory credits, the number the bears watch, rose to 18.1% from 16.3% in the second quarter and 15.4% a year earlier, even though credit sales fell to $113 million from $417 million. Energy generation and storage revenue fell 16% to $2.88 billion, partly on tariff-related refunds to customers, but the segment's margin rose to 33% from 20% on 13.7 gigawatt-hours deployed, and services revenue rose 33% to $4.61 billion with a record $734 million gross profit.
The cost side is where the AI ambitions show. Operating expenses rose 39% to $4.78 billion, with research and development up 69% to $2.76 billion, so operating income fell 56% to $718 million, a 2.6% margin, and GAAP net income fell 43% to $787 million, or $0.22 a share, a figure that includes a $288 million unrealised gain on bitcoin and a $142 million unrealised loss on the company's SpaceX stake. Adjusted earnings of $0.48 a share beat the $0.45 consensus but were down 4% from a year earlier. The cash numbers surprised the other way: capital spending of $4.73 billion was below the second quarter's $5.79 billion, free cash flow was $1.53 billion against an outflow of $1.09 billion three months earlier, cash and investments ended the quarter at $45.4 billion, and the company cut its 2026 capital-spending guidance to about $20 billion from "more than $25 billion," saying it had secured up to $30 billion of borrowing capacity it does not intend to use this year.
The call was about the products that are not yet in the numbers. Paid Full Self-Driving subscriptions reached 1.74 million, up 67%, and chief financial officer Vaibhav Taneja said more than three-quarters of North American deliveries now include a paid FSD subscription at delivery. The robotaxi service operates in six cities with nearly two million unsupervised miles, Dallas is due next month, the first customer activation of unsupervised FSD is targeted for the second quarter of 2027, and management said robotaxi revenue should become noticeable by the second quarter of next year and significant by the end of it. The Cybercab is building at the rate the fleet needs, with customer availability targeted for the end of 2026; early production of Optimus has begun on the Fremont line, with Elon Musk saying 20,000 units a week will take at least a year. Megapacks are nearly sold out for 2027. "Demand is growing rapidly for our vehicles," Musk said. "It is exceeding our production by a significant margin."
On the subject that had moved the stock all day, the company said nothing. Musk had told SpaceX's call on Tuesday that both boards had formed special committees of independent directors to study a combination, that he was conflicted and would not join the discussions, and that a deal should not be treated as certain; Tesla said it would take no merger questions, and Musk said he had "said everything that should be said yesterday." The shares had closed up 3.41% at $386.47, a three-month high, on that optionality, and slipped 2.2% to $377.88 in extended trading; Binance's tokenised TSLAB pair printed $395.10 in the first minutes after the release and $368.70 by the Asian morning, which puts it 4.6% below the close.
The split in the stock's two reactions is the split in the company. A merger with SpaceX, whose AI segment made $7.56 billion last quarter, is worth more to Tesla's valuation than an 18% automotive margin, and the after-hours fade says the quarter alone did not justify a three-day, 8% run. The numbers that improved, margin, cash flow and capital discipline, are the ones that matter if the merger never happens; the ones the market is trading, robotaxi timelines and special committees, are the ones nobody can model. At 2.6% operating margin, Tesla is being valued as a company about to become something else, and on Wednesday it confirmed that it is thinking the same way.