Tesla Q3: Profit Slumps Despite Cash Flow Beat and SpaceX Merger Talks

Key points

• Net profit fell to $787 million from $1.4 billion a year earlier, missing the $815 million analyst estimate.
• Revenue was $28.05 billion, slightly below the $28.13 billion consensus, but adjusted EPS of $0.48 beat the $0.44 estimate.
• Free cash flow came in at $1.53 billion, far exceeding the estimated negative $4.92 billion, while capex was $4.732 billion versus an estimated $7.96 billion.
• Tesla lowered full-year capex guidance to $20 billion from $25 billion, stating it will fund spending from operating cash flows.
• Elon Musk confirmed on the SpaceX earnings call that both companies' boards have formed special committees to discuss a potential merger.

Background

Prior to the report, analysts expected flat revenue and a 10% drop in earnings per share, with negative free cash flow due to heavy spending on AI and robotics. Tesla had delivered 486,532 vehicles in Q3, a 2% decline year-over-year. The company had previously faced margin compression from rising interest rates and the end of federal EV tax credits. SpaceX, which went public in June, had recently reported strong results, fueling speculation about a tie-up with Tesla.

How outlets are covering it

The New York Times emphasized the slump in net profit and the heavy investment in new technologies like self-driving cars and humanoid robots. CNBC highlighted the potential merger with SpaceX, noting Musk's comments about a 'good idea' and the high hurdle of a 50% shareholder vote. Yahoo Finance focused on the positive free cash flow and lower capex, noting that Morningstar analyst Seth Goldstein attributed the stock drop to capacity constraints in auto and battery growth. All outlets agreed that Tesla's stock underperformed megacap tech peers, down 14% for the year.

Why it matters

The results signal a shift in Tesla's strategy toward AI and robotics, with significant capital spending that may impact near-term growth. The potential merger with SpaceX could create a massive conglomerate spanning cars, rockets, and AI, but requires substantial shareholder support. The positive free cash flow suggests improved operational efficiency, but the profit decline raises concerns about the sustainability of heavy investment in new technologies.

What to watch

Investors will watch for updates on Tesla's Full Self-Driving system and Cybercab robotaxi deployment. The outcome of the special committees' discussions on a Tesla-SpaceX merger will be a key development. Tesla's ability to fund its $20 billion capex from operating cash flows will be closely monitored in future quarters.