Tesla delivered stronger quarterly earnings than Wall Street expected on Wednesday, but the headline beat came with a significant catch: shrinking profits. Elon Musk's company earned $787 million for common shareholders in the third quarter, down 29% from $1.11 billion a year earlier.

Despite the earnings beat, investors sent the stock down more than 3% in after-hours trading. Selling cars is becoming more difficult, and the company's ambitious AI plans are not getting any cheaper.

The quarter captures the tension now defining Tesla: a core car business squeezed by cheaper rivals and shifting policy, funding an increasingly expensive push into autonomy and robotics.

Cheaper cars, more expensive AI

The quarterly results looked healthier at first glance:

• Adjusted earnings came in at 48 cents per share, ahead of the 43 cents analysts expected.
• revenue reached $28.05 billion, topping the $27.9 billion estimate.
• Automotive revenue fell 3% to $20.56 billion.

Customers are paying less per vehicle, and battery production problems prevented Tesla from building enough cars to meet demand. Energy revenue offered no offset, declining 16% to $2.88 billion. Services and other revenue was the bright spot, climbing 33% to $4.61 billion.

Under standard accounting measures, earnings per share fell from 32 cents to 22 cents. Capital expenditure nearly doubled to $3.73 billion, driven by investments ranging from artificial intelligence to Tesla's own Optimus humanoid robot. Free cash flow dropped 62% to $1.53 billion, though it remained positive.

Pressure on the car business extends well beyond the factory floor. Third-quarter deliveries totaled 486,532 vehicles, roughly 2% fewer than a year earlier. Tesla posted record sales in Canada, Japan, Taiwan and Australia, but those gains have not compensated for sluggish growth in its largest business.

Chinese rivals BYD and Xiaomi are winning attention in Asia and Europe with competitively priced electric vehicles. The loss of a US federal EV tax credit last year also hurt demand.

There was stronger momentum in driver assistance. Active FSD (Supervised) subscriptions totaled 1.74 million, a 67% year-over-year increase, with adoption up 20 percentage points from the second quarter, according to Tesla. The partially automated system is priced at $99 per month in the United States and requires driver supervision.

"We believe that FSD is driving demand in markets where it is available, and we continue to work with regulators to get it approved in other markets," the company said.

Robotaxis, Optimus and a possible SpaceX deal raise bigger questions

Ashok Elluswamy, Tesla's vice president of Autopilot, said some customer vehicles could receive the company's upcoming FSD (Unsupervised) around the second quarter of 2027.

Musk also wants to push the Cybercab beyond Austin this year. The bronze two-seat vehicle is undergoing testing, but ordinary customers cannot buy one. Instead, Tesla expects to own most of the fleet and charge riders for trips. Chief Financial Officer Vaibhav Taneja said the expansion means monitoring expenses such as charging, repairs and cleaning.

"The vast majority of the Cybercab stuff will be essentially Tesla-owned and transport-as-a-service," Musk said.

Texas motor vehicle records list 362 Model Y robotaxis and 449 Cybercabs authorized for driverless operations. Musk expects the service to begin showing up meaningfully in Tesla's finances during 2027, particularly in the later part of the year.

"It's not like going to move the needle this quarter," Musk said. "I think it starts to become noticeable in Q2 and then probably a big deal by Q3 or Q4 of next year."

He went further, predicting Tesla could eventually account for most passenger miles worldwide in countries without regulatory restrictions or protectionist barriers.

Then there is the question of whether Tesla and SpaceX might merge. A day earlier, Musk told SpaceX investors that combining his two companies could make sense. Both boards have established special committees to consider the idea.

"I feel like I'm tap dancing through a minefield," Musk said. "I think I said everything that should be said yesterday."

The companies already overlap on a planned semiconductor factory in Grimes County, Texas, involving Intel, as well as work on Tesla's refreshed Roadster. Those connections have fueled talk of a historic deal, although Musk provided no new merger details.

As for Optimus, Musk said its AI systems are improving, but the robots still struggle with open-ended tasks. Engineers must resolve mechanical design, reliability and operating-time issues alongside the software challenges. He expects those problems to be addressed by the end of 2027 — a deadline that, alongside the robotaxi ramp and the special committee reviews, gives readers clear checkpoints for tracking whether Tesla's biggest spending commitments begin to translate into results.