Tesla missed revenue estimates by 0.7% this quarter. Tesla spoke a lot about notably robust demand for its cars and lackluster growth for the segment being held back by battery supply availability and auto inventory. Their vehicle backlog did set a 4-year high, which meshes well with that commentary, but global inventory days outstanding rose from 10 to 11 Y/Y, which is not something I’d expect to see if Tesla doesn’t have enough cars to sell to customers.

Furthermore, auto revenue from Q3-2023 to Q3-2026 compounded at just a 1.6% annual clip. Deliveries grew at a 3.8% compounded annual clip over that time. Considering this segment hasn’t grown beyond global GDP for 3 years, it’s odd to hear them talk about struggling with production capacity. They’ve added plenty of additional manufacturing muscle during that time, so I’m not sure how there’s a factory output issue holding back growth.

Regardless of what the true issue is, it’s hard to call the core business anything but challenged right now. Bulls are focused on the future, with exciting projects like Optimus, Robotaxi and the semi-truck making many willing to overlook current core demand that is not amazing.

Auto gross margin ex-regulatory credits rose from 16.3% to 18.1% Q/Q. This was tied to APAC revenue mix shift and an ability to offset commodity inflation headwinds with reductions in vehicle financing benefits. While the growth issue doesn’t support their strong demand pitch for the auto business, the ability to cut consumer benefits to offset current cost headwinds does provide supporting evidence of that being true. Energy gross margin got a lot of help from tariff refunds during the quarter alongside a reduction in warranty expenses due to a supplier settlement. Despite none of this help being structural, Tesla still thinks margins will keep improving over the coming years from here.

EBIT margin fell despite the GPM expansion as Tesla remains firmly in a massive investment cycle. Cost growth related to superintelligence, data center depreciation, chip R&D, and spending tied to Optimus, Megapack (general-purpose battery storage system) and the semi-truck launch drove the decline. Accelerated OpEx growth (roughly 50% Y/Y growth this quarter vs. 47% last quarter and 42% two quarters ago, excluding restructuring charges; 39%, 47% and 37% including them).

For net income, the marked valuation of its SpaceX holding was a $142M headwind while Bitcoin holding valuation helped net income by $290M. FCF swung to $1.5B from -$1.1B last quarter as CapEx fell to $4.7B from $5.8B and operating cash flow reached $6.3B.

Tesla added $30B in borrowing capacity during the quarter to give it more CapEx firepower. They don’t expect to begin drawing from this facility during 2026, but it will likely be used eventually.

Tesla lowered annual CapEx guidance from $25B+ to $20B. On the other hand, they again just added $30B in borrowing flexibility to fund their AI buildout.

Tesla trades for 175x forward EPS. EPS is expected to grow by 6% this year, 22.5% the following year and by 49% in 2028. That puts it at 115x 2028 EPS estimates. It is not expected to generate annual positive FCF again until 2029.