Tesla Q3 2026 Results: Margin Recovery and SELL Rating Outlook November 4, 2026

Overview

Tesla reported third-quarter 2026 results above expectations, with nine-month revenue and adjusted net profit after minority interests at 82% and 84% of full-year 2026 estimates. Adjusted net profit, excluding share-based compensation and fair value changes on bitcoin and SpaceX shares, fell 4% year-on-year to US$1.7 billion, as a 39% rise in operating expenses and a 73% fall in regulatory credits offset a 9% rise in gross profit. Revenue was flat year-on-year at US$28.0 billion. Deliveries fell 2% year-on-year to 487,000 units against a third-quarter 2025 base lifted by buying ahead of the US electric vehicle tax credit expiry, but beat consensus of 462,000. Active Full Self-Driving subscriptions rose 67% year-on-year to 1.74 million, while free cash flow fell 62% year-on-year to US$1.5 billion as capital expenditure more than doubled to US$4.7 billion.

Investment Positives

Margins Recover on Vehicle Mix, Energy and Services

Gross margin rose 1.6 percentage points year-on-year to 19.6%. Auto gross margin excluding credits improved to 18.1% from 15.4% in the third quarter of 2025, driven by a higher Asia-Pacific delivery mix, as Model Y set delivery records in several markets including Australia, Japan and Taiwan. Energy gross margin rose to 33.1% from 31.4%, supported by tariff refunds and a vendor reimbursement of cell warranty costs. The Services and Other segment delivered strong performance, with revenue rising 33% year-on-year to US$4.6 billion and record gross profit of US$734 million at a 15.9% margin, led by Supercharging and insurance. Tesla exited the quarter with its largest order backlog in four years, and Megapacks are almost sold out for 2027.

FSD and Robotaxi Are Scaling

Active Full Self-Driving (FSD) subscriptions rose 67% year-on-year to 1.74 million, with half of those on monthly subscriptions, and over 75% of North America deliveries signed up for paid FSD at delivery. The chief financial officer agreed that FSD annual recurring revenue is approaching US$1 billion. FSD is approved in nine European countries, and management expects approval across the EU by the first quarter of 2027. Cybercab rides started in Austin on 3 September, cumulative unsupervised miles rose eightfold in the quarter, and Robotaxi launches in Dallas next month. Semi started volume production in Nevada, and Optimus started early production on the Fremont high-volume line.

Investment Challenges

OPEX Growth Absorbs the Margin Gains

Operating income fell 56% year-on-year to US$718 million, and the operating margin fell to 2.6% from 5.8% in the third quarter of 2025. Operating expenses rose 39% year-on-year to US$4.8 billion, as research and development increased 69% to US$2.8 billion on SI compute depreciation, chip development and ramp costs for Optimus, Megapack 3 and Semi. Share-based compensation rose 76% to US$1.2 billion on the 2025 CEO Performance Award. Management expects operating expenses to keep rising until these products are commercialised. Regulatory credits fell 73% year-on-year to US$113 million, and GAAP net profit fell 43% year-on-year to US$787 million.

Auto and Energy Revenue Fell

Auto revenue fell 3% year-on-year to US$20.6 billion on lower average selling prices, lower regulatory credits and 2% fewer deliveries, as deliveries of other models fell 48% year-on-year. Energy revenue fell 16% year-on-year to US$2.9 billion, partly due to tariff-related customer refunds, and storage deployments of 13.7 gigawatt-hours, up 10% year-on-year, missed consensus of 15.9 gigawatt-hours. The energy margin was lifted by tariff refunds received and a warranty reimbursement, which may not recur. Free cash flow fell 62% year-on-year to US$1.5 billion as capital expenditure more than doubled to US$4.7 billion. Higher commodity costs and interest rates add further cost pressure.

Outlook

Full-year 2026 capital expenditure guidance was cut to approximately US$20 billion from over US$25 billion previously and will be funded mainly from operating cash flow, with no draws planned this year on the new US$30 billion debt facilities. However, management expects capital expenditure to rise over the next few years on the Robotaxi fleet, Optimus capacity, solar manufacturing, SI compute and the Terafab chip plant, which needs tens of billions by early 2028 and possibly over US$100 billion in the long term. Optimus should take at least a year to reach 20,000 units a week, with external deliveries from the end of 2027. Unsupervised FSD in customer cars is expected around the second quarter of 2027, and Tesla targets 5 million vehicles a year by around 2030.

We note that the third quarter of 2026 was better on margins but not on profit. While gross margin recovered to 19.6% on vehicle mix, energy refunds and services, the 39% rise in operating expenses absorbed the gain, and operating margin of 2.6% is less than half of the third-quarter 2025 level. Part of the energy margin gain came from tariff refunds and a warranty reimbursement that may not recur. We remain cautious in the near term due to margin compression from rising operating expenses and fading regulatory credits, intense competition in China from BYD and domestic EV brands such as Xiaomi and Geely, elevated capital expenditure requirements, and the fact that meaningful revenue from Robotaxi and Optimus is still more than five years away. At 248 times financial year 2026 estimated price-to-earnings, the analyst believes optionality is already priced in.

Recommendation and Target Price

Phillip Securities Research maintains a SELL recommendation on Tesla with a higher target price of US$230, raised from US$220 previously. The increase reflects an 8% raise in financial year 2026 earnings estimates from higher auto revenue estimates. The weighted average cost of capital and growth rate assumptions of 9% and 5% respectively remain unchanged.

*This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.*

 
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