Speeding Up FSD's Arrival in China

Author｜Wang Lei

Editor｜Qin Zhangyong

After reviewing Tesla's earnings report, it's clear why Musk is keen on merging with SpaceX.

Over the past two trading days, two of Musk's trillion-dollar enterprises have unveiled their earnings. First, SpaceX released its second quarterly report since going public, boasting a 161% year-over-year revenue surge and achieving single-quarter profitability for the first time, which propelled its stock up by 8% in after-hours trading.

However, 24 hours later, Tesla's Q3 results told a different story:

Operating profit stood at $718 million, marking a staggering 56% decline from the previous year, with the operating profit margin dropping from 5.8% in the same period last year to 2.6%. GAAP net profit was $787 million, a 43% year-over-year decrease, representing Tesla's worst profit performance in recent years.

Yet, its comprehensive gross profit margin, a key indicator of profitability, reached 19.6%, with overall gross profit hitting $5.494 billion, up 9% year-over-year. The gross profit margin for the automotive business also rebounded to 18.5%, slightly surpassing market expectations.

Thus, the profit decline can't be simply chalked up to "Tesla not making money from selling cars." On the contrary, it's "selling cars" that's keeping the company afloat.

01 Cars Generate Profits, But Funds Are Redirected

How did Tesla manage such a contradictory Q3 performance?

The answer isn't hard to find: Musk is increasingly funneling the profits from car sales into autonomous driving, humanoid robots, and AI.

Let's start with the basics. Tesla reported revenue of $28.046 billion in Q3, roughly flat compared to $28.09 billion in the same period last year and slightly below market expectations of $28.13 billion.

Revenue remained relatively stable; the issue lay in profits.

GAAP net profit was $787 million, a sharp 43% year-over-year decline, while adjusted net profit was $1.697 billion, down 4% year-over-year. Adjusted earnings per share were $0.48, higher than market expectations of $0.44. Operating profit was $718 million, more than halving year-over-year, with the operating profit margin sliding from 5.8% in the same period last year to 2.6%.

With profits plummeting, many initially thought Tesla's cars weren't selling. However, that wasn't the case.

In Q3, the automotive segment, still the core pillar, reported revenue of $20.56 billion, down 3% year-over-year, but globally, 486,500 vehicles were delivered, marking two consecutive quarters of over 480,000 deliveries. Moreover, the gross profit margin for the automotive business further rebounded to 18.5%.

Meanwhile, vehicle inventory supply days dropped from 15 days in the previous quarter to 11 days, far lower than the 27 days in Q1. Additionally, the earnings report showed that passenger car backlog orders reached their highest level in four years.

This clearly demonstrates that Tesla's cars were in high demand in Q3. Even Musk stated during the earnings call that the company's current automotive demand exceeds production capacity, and efforts are underway to increase output at various factories.

The issue lies with regulatory credits. Previously, these credits provided high-profit supplements for Tesla, but this benefit is rapidly diminishing. In Q3, Tesla's revenue from regulatory credits was just $113 million, a 73% plunge from $417 million in the same period last year, offsetting some of the gains from improved production efficiency.

As a result, excluding regulatory credit revenue, the gross profit margin for the automotive business remained at 18.1%, up 1.8 percentage points from 16.3% in Q2 and higher than 15.4% in the same period last year.

In other words, the money earned from selling cars itself hasn't decreased; in fact, it's become more profitable.

So why did operating profit and net profit decline sharply despite growing demand and gross profit? The answer lies in expenses.

In Q3, Tesla's capital expenditures surged 110% to $4.732 billion (approximately RMB 31.59 billion), directly causing free cash flow to shrink significantly to $1.531 billion (approximately RMB 10.221 billion), a sharp 62% year-over-year decline.

Operating expenses reached $4.776 billion in Q3, up 39% year-over-year. R&D expenses alone jumped 69% to $2.76 billion.

Musk's "$1 trillion compensation plan," which drew much attention last year, has also started to appear in the reports. Stock-based compensation for the entire company reached $1.165 billion in Q3, up 76% year-over-year, a significant reason for the 29% increase in selling, general, and administrative expenses.

Tesla didn't shy away from revealing where this money went in its earnings report—almost all of it was poured into AI, Optimus humanoid robots, and Cybercab autonomous taxis.

Tesla stated that increased investments in AI, superintelligence, and other R&D projects, rising equity incentive expenses, and growing sales and administrative expenses were key reasons for the decline in operating profit. Meanwhile, reduced regulatory credit revenue and a decline in gross profit for the energy storage business also had negative impacts.

It's evident that cars remain the main business, but Tesla is already preparing for its next path, explaining the seemingly contradictory performance in Q3.

Moreover, it's worth noting that Tesla has proactively lowered its full-year capital expenditure guidance from $25 billion to $20 billion while securing a $30 billion borrowing capacity for future expansion.

Scaling back investment pace while preparing ammunition in advance indicates that Robotaxi, Optimus, and chip factories—these cash-consuming ventures—are about to enter a protracted battle.

02 Musk Stays Mum on "Merger"

Perhaps due to the lackluster nature of the earnings report itself or to quell shareholders' doubts about the lack of visible results from heavy spending, Musk unusually provided a clearer commercialization timeline for various business lines during the earnings call.

First, FSD is starting to become a business. In management's view, the most significant change in Q3 wasn't the number of vehicles delivered but the increasing number of vehicles delivered with FSD subscriptions bound to them.

As of Q3, Tesla's global active paid FSD users reached 1.74 million, with half being subscribers. Additionally, over 75% of new car deliveries in North America included paid FSD, up nearly 20 percentage points from Q2.

This means Tesla is attempting to extend automotive profits from one-time sales to ongoing software revenue.

During the earnings call, CFO Tanejha specifically explained that each new car comes with a one-month free FSD trial, and the proportion mentioned refers to customers still choosing to pay for a subscription despite the free trial, hinting at future disclosures of more metrics on FSD revenue, renewal rates, and churn rates.

Notably, an analyst estimated during the call that FSD's annual recurring revenue is nearly $1 billion, an estimate Tanejha endorsed.

However, regulatory issues remain the biggest constraint. Musk stated that FSD has been approved in nine EU countries. He expects EU-wide approval within months and said he would be surprised if it comes later than Q1 2027.

Regarding the Chinese market, the earnings call also saw new discussions. Tesla believes its technology still holds an advantage and is actively pushing for broader FSD market approval in China.

Compared to FSD's growth, Robotaxi's progress was described by Musk as "like a rocket entering orbit." By the end of Q3, Tesla Robotaxi's cumulative unsupervised driving miles neared 2 million, eight times the figure at the end of Q2.

Musk said the Cybercab fleet in Austin has grown about 10-fold since going live a month ago, with plans to launch Cybercab in Dallas in November and expand to other cities by year-end.

Not only expanding operational scope but also increasing operational hours, aiming for 24/7 operation by year-end and extending to highways, while ordinary car owners' vehicles are expected to join the Robotaxi fleet around Q2 2027, contingent on meeting geofencing, vehicle management, and regulatory approval conditions.

After some praise, Musk didn't forget to add a blunt truth: the actual contribution of Robotaxi to financial statements won't start to show until after Q2 2027, and it won't become a significant profit source until Q3 or Q4.

In other words, investors will have to wait another three to four quarters to see this story materialize in numbers.

The robot, on which even greater hopes are pinned, requires a longer investment cycle. Although in Q3, Optimus has begun early production on mass production lines at Fremont Factory, and even the first batch of robots meeting mass production quality standards has rolled off the line.

However, achieving the goal of producing 1 million units annually or 20,000 units per week "will take at least a year, perhaps longer," Musk admitted, with hand mechanics remaining the primary hardware challenge. Musk stated that robot fingers must be soft enough to pick up fragile items while withstanding repetitive motions and long-term wear while protecting internal sensors, increasing design difficulty.

AI capabilities and reliability also need simultaneous improvement. According to Musk's expectations, Optimus plans to integrate the next-generation AI5 chip around April 2027, further enhancing the robot's computing power.

He also previewed that a demo video of Optimus would be released in about a month, specifically emphasizing that "he doesn't want the movements to be preset." This statement is markedly more restrained compared to his previous bold claim of "mass-producing 1 million units next year."

Moreover, the delivery timeline has also been pushed back by Musk to around the end of 2027 before starting deliveries to external customers.

The chip manufacturing plan supporting the automotive and robot businesses is also progressing simultaneously. Musk expects equipment debugging to begin in H1 2027, with attempts to manufacture the first chip in May or June, and true mass production targeted for the end of 2028.

The most unusual scene of the day occurred when, during SpaceX's earnings call the previous day, Musk stated that a merger between SpaceX and Tesla was under discussion and a special committee had been formed.

Yet, during Tesla's earnings call a day later, he remained tight-lipped, saying, "Regarding the potential merger with SpaceX, I think I've said everything yesterday (Tuesday)," Musk said.

He left with a cryptic remark—"dancing the tap dance in a minefield, that's it"—before saying no more.