Is Tesla a Buy After Its Latest Earnings Report?

Shares of Tesla (NASDAQ:TSLA) slipped on Thursday as investors digested the company's third-quarter earnings report. And those results were clear -- despite improved free cash flow, Elon Musk's ambitious plans for artificial intelligence and robotics aren't doing much to help the company's bottom line.

Tesla shares were down more than 1% in morning trading following the earnings report, which showed another quarter of year-over-year shrinking operating margins.

The market's reaction highlights a significant problem. Under Musk's leadership, the company is spending billions of dollars developing autonomous vehicles, humanoid robots, and AI technology, but its earnings are heavily dependent on its automotive business.

And that business isn't generating the profits it used to.

Image source: Getty Images.

A look at Tesla's earnings report

Tesla's third-quarter revenue was $28.05 billion, essentially unchanged from a year ago. The company's automotive revenue fell 3% to $20.56 billion, and energy generation and storage revenue dropped nearly 16% to $2.88 billion.

But the biggest concern was profitability.

Operating income was $718 million, down 56% from a year ago. Tesla's operating margin was 2.6%, which was an improvement from 1.4% in the previous quarter, but still down from 5.8% in the third quarter of 2025. The problem was higher operating expenses, which increased 39% to $4.78 billion, as Tesla continues to spend heavily on research and development.

Tesla delivered 486,532 vehicles during the quarter, down 2% from a year ago. Automotive gross margins excluding regulatory credits improved from 15.4% to 18.1%. That's a positive sign for the company's core business, particularly after several quarters of pricing pressure.

Tesla also generated $1.53 billion in free cash flow, thanks in part to its decision to cut projected 2026 capital expenditures from $25 billion to $20 billion. However, Tesla still faces substantial investment requirements as it expands its AI and robotics operations.

So, while Tesla is making progress in some areas, its overall profitability continues to move in the wrong direction.

Tesla's future businesses aren't paying the bills yet

Musk has repeatedly argued that Tesla's biggest opportunities have little to do with selling electric vehicles.

He believes the company's Optimus humanoid robots could eventually become its most important product, although the company remains at least a year away from shipping robots to outside companies. Tesla is also developing its Cybercab autonomous transportation business and expanding Full Self-Driving technology.

Tesla reported approximately 1.74 million active FSD users, while more than 75% of new North American vehicle deliveries included an FSD subscription sign-up. That could eventually create a valuable source of recurring revenue, particularly if Tesla can convince customers to maintain their subscriptions.

But there's a considerable difference between developing promising technology and turning it into a profitable business.

Optimus isn't generating meaningful commercial revenue, and Tesla's robotaxi operations remain in their early stages. So as of now, automotive sales account for roughly 73% of Tesla's revenue.

There's also another layer of uncertainty for investors trying to determine what Tesla might look like several years from now. Tesla is considering a merger with Musk's other publicly traded company, Space Exploration Technologies (NASDAQ:SPCX). Independent committees are exploring the issue, although no agreement has been announced.

Is Tesla stock a buy?

Tesla's earnings report is another example of the "show-me" era of Wall Street and artificial intelligence at work. The market continues to punish companies that are spending on AI without showing results.

Musk has an ambitious vision for Tesla, and the company's advances in autonomous driving and robotics could eventually create substantial new revenue opportunities.

But margins are shrinking, the Optimus won't be ready until late next year at the earliest, and to be honest, Musk and Tesla seem more interested in outfitting the second-generation Tesla Roadster with rockets than delivering an automobile that's been in development for a decade. It's no wonder that some shareholders are giving the company a skeptical side-eye.

Tesla's improving automotive gross margins are encouraging, but they haven't translated into stronger overall operating profitability. And its AI initiatives still have plenty to prove before they can justify the money being invested.

That's why I wouldn't buy Tesla stock following this earnings report. Until the company's emerging businesses begin contributing meaningful profits, investors are paying for Musk's vision while relying on an automotive business that's struggling to deliver earnings.

Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.