Tesla's third-quarter results showed a significant beat on free cash flow expectations, with the company generating $1.53 billion instead of burning cash as previously anticipated. This marked a sharp contrast to the $4.99 billion loss forecast by analysts, highlighting a major shift in the company's financial performance. However, the positive cash flow was partly driven by reduced capital expenditures, which fell short of the $7.77 billion consensus. While generating cash is a positive, the company's spending plans for 2026 remain ambitious, with a target of $25 billion in capital expenditures, making it unclear whether the current pace will be sustainable.
The financial report also revealed increased spending on research and development, with operating expenses rising 39% year-over-year. This reflects Tesla's ongoing investment in projects like Optimus and the Cybercab, which are expected to drive future growth. However, the company's operating margin dropped to 2.6%, a far cry from the 5.8% margin recorded a year ago. Despite this, the gross margin improved to 19.6%, driven by better regional and product mix, as well as increased FSD subscription revenue. Nevertheless, Tesla's average selling prices declined, and the company attributed its flat sales to limited battery availability, which has led to a significant backlog of unsold vehicles.
While Tesla's energy segment saw a decline in revenue, its services and other segments performed well, with revenue up 33% and a record gross profit. The company also reported progress in its autonomy initiatives, with FSD subscriptions reaching 1.74 million and Robotaxi vehicles logging over 2 million unsupervised miles. However, the broader market appears to be more focused on the potential merger between Tesla and SpaceX, which has overshadowed the earnings report. Despite the positive cash flow, the stock did not see a significant rally, indicating that investors are more concerned about the long-term implications of the merger and the company's financial commitments.