Tesla cut its annual capital expenditure forecast by a fifth and posted surprise positive free cash flow in the third quarter on Wednesday, after investing far less in its AI and robotics ambitions than Wall Street had expected.
The unexpected cash generated in the quarter comes at a critical moment for Tesla, as CEO Elon Musk explores combining the EV maker with his far more capital-intensive space venture, SpaceX.
While the lower spending strengthens Tesla’s financial position ahead of any deal, preserving cash at the expense of investment — in AI, robotaxis and humanoid robots — could undermine the very growth story investors are betting on.
Tesla shares, which had risen 2 percent in after-hours trading after the company reported positive cash flow, higher gross margin and market-beating revenue, reversed course to trade down 2 percent. They have fallen about 14 percent this year.
"The free cash flow beat was a pleasant surprise, but when combined with the lower-than-expected capex, raises questions on the next step for the automaker," said Ryan Lee, senior vice president of product and strategy at Direxion, which offers ETFs tied to Tesla. "Lower capex suggests less of an 'all-in' approach to the AI arms race than one would expect from Elon."
Tesla said it expected capital expenses for 2026 to be roughly $20 billion, down from its previous forecast of more than $25 billion, but did not say what it would spend less on.
In the third quarter ended September 30, Tesla spent $4.7 billion in capex, double that of a year ago, but lower than the $7.5 billion analysts on average were expecting, according to LSEG data. Tesla reported free cash flow of $1.53 billion, compared with an expected $4.92 billion cash burn.
SpaceX Merger Under Discussion
Musk said on Tuesday that a merger between Tesla and SpaceX was a "good idea" and that the companies had formed special committees to discuss a deal. On Wednesday, Musk said on a conference call with analysts that he had no more to say on the matter.
A merger would create a single company at the centre of Musk's long-term vision: an integrated technology and manufacturing empire spanning AI, energy, robotics, communications and transportation on Earth and beyond.
Still, investors will seek evidence that Tesla is investing enough to turn Musk’s ambitions into commercial businesses, with the robotaxi rollout lagging his promises. Tesla's energy unit has recently offered a counterweight to its auto business, which remains under scrutiny as rivals globally launch newer, often cheaper models. Tesla still leans heavily on the aging Model 3 and Model Y.
"The merger still faces a high bar, but tonight’s numbers make the financial logic harder to ignore," said Thomas Monteiro, a senior analyst at Investing.com.
"The main takeaway is that Tesla's surprisingly positive cash flow quarter did not come from stronger profits, but from spending billions less than planned at a time when SpaceX is preparing to invest up to $40 billion in a single quarter."
Revenue Flat but Beats Estimates
Revenue was flat from a year earlier, despite the end of US tax credits that supported sales last year. That was enough to top Wall Street targets. Net income plunged 43 percent.
Tesla said in a statement that it ended the quarter with the largest backlog for its passenger vehicles in four years. High gasoline prices have stoked demand for EVs, especially in Europe.
With 486,532 vehicles delivered in the third quarter, Tesla is on track to increase annual deliveries for the first time in three years.
"Demand is growing rapidly for our vehicles. It's exceeding our production by a significant margin," Musk said on the conference call with analysts. "In a nutshell, after many years of sort of grind and things being fairly flat, I think we're now headed for a lot of fun and significant growth."
The FSD (supervised) attach rate reached over three-quarters of new vehicle deliveries in North America, a nearly 20-percentage-point increase from the second quarter, Tesla said.
Automotive gross margin, excluding regulatory credits, came in at 18.1 percent in the third quarter, higher than analysts’ estimates of 16.7 percent, according to Visible Alpha data.
Tesla said it was aiming to produce 5 million vehicles a year by about 2030, up from an expected 2.5 million this year.