Tesla’s Earnings Call: Higher Margins, Heavier Spending

Tesla Motors ((TSLA)) has held its Q4 earnings call. Read on for the main highlights of the call.

Tesla’s Earnings Call Balances Record Margins With Heavy Spending Push

Tesla’s latest earnings call mixed clear operational wins with frank acknowledgement of mounting financial pressure. Management highlighted a strong rebound in core profitability — notably higher automotive and total gross margins, record energy revenue, and accelerating progress in autonomy and robotaxis. At the same time, they underscored real near‑term challenges: a sharp decline in deliveries, rising operating expenses, pressure from shifting Full Self-Driving (FSD) to subscriptions, and an aggressive capital spending plan that will weigh on cash and may force Tesla to tap external funding. The message was that Tesla is deliberately trading near-term earnings quality for what it views as a larger, long-run lead in AI, autonomy, energy, and robotics.

Automotive Margins Rebound Despite Falling Deliveries

Tesla delivered a notable improvement in its core car business margins even as volumes dropped. Automotive gross margin excluding regulatory credits climbed from 15.4% to 17.9%, a 2.5 percentage-point gain quarter-on-quarter. Automotive gross profit was flat sequentially despite a 16% drop in deliveries, thanks largely to a more favorable regional mix, with higher contributions from APAC and Europe. This suggests Tesla was able to offset weaker volume and lower fixed-cost absorption with better pricing and mix in certain markets, hinting at resilient demand and discipline in how it allocates supply globally.

FSD Adoption Climbs as Tesla Shifts to Subscriptions

Full Self-Driving penetration continues to deepen across Tesla’s fleet. The company reported nearly 1.1 million paid FSD customers worldwide, with about 70% of them having bought the software upfront. Beginning this quarter, Tesla is shifting fully to a subscription-based FSD model. Management expects subscription growth to drive net additions but acknowledged that this shift will temporarily weigh on automotive margins as revenue is recognized over time rather than at purchase. Still, the company framed FSD subscriptions as strategically attractive recurring revenue, and a key lever for long-term software-like returns on its installed base.

Energy Business Delivers Record Revenue and Profit

Tesla’s energy segment showed strong momentum, setting new records on both the top and bottom line. Energy revenue for the year reached roughly $12.8 billion, up 26.6% year over year, with the quarter delivering record gross profit. Backlog remains healthy, and new products — including MegaPack 3 and Mega Block — are expected to support further deployment growth. This performance underscores Tesla’s evolution beyond autos, with energy storage becoming a more meaningful contributor to total revenue and profit, even as the company prepares for a tougher, more competitive environment in this segment.

Total Gross Margin Tops 20% for First Time in Two Years

At the consolidated level, Tesla’s profitability turned a corner. Total gross margin surpassed 20.1%, its highest level in more than two years, despite multiple headwinds, including tariffs and lower fixed-cost absorption tied to weaker deliveries. This improvement signals that efficiency gains, mix optimization, and the contribution from higher-margin businesses like energy are beginning to offset some of the pricing pressure and cost inflation that previously compressed margins.

Robotaxi Rollout and Autonomy Progress Accelerate

Tesla showcased concrete progress toward its autonomy ambitions. The company has launched public unsupervised robotaxi rides in Austin, with vehicles operating without a driver, safety monitor, or chase car. Management highlighted a growing fleet of over 500 robotaxi vehicles serving paying customers between the Bay Area and Austin and suggested that fleet expansion is following an exponential growth curve. This marks a major milestone for Tesla’s software and AI strategy and supports its narrative of evolving from an automaker into a platform for autonomous mobility services.

Storage Records and Global Vehicle Backlog Point to Underlying Demand

Storage deployments hit another record, reinforcing the strong performance of Tesla’s energy operations. On the vehicle side, while quarterly deliveries fell, the company ended 2025 with a larger global vehicle backlog than in recent years and achieved record deliveries in a range of smaller markets, including Malaysia, Norway, Poland, Saudi Arabia, and Taiwan. This suggests that despite short-term production and supply constraints, underlying demand remains robust across both established and emerging markets.

Solid Free Cash Flow and a Large Cash War Chest

Tesla ended the quarter with a positive free cash flow of $1.4 billion and held over $44 billion in cash and investments. This substantial liquidity gives the company firepower to pursue its increasingly ambitious investment agenda, from new factories to AI infrastructure. Management portrayed this cash reserve as a strategic buffer that allows Tesla to invest aggressively even as near-term earnings and cash flow volatility rise.

Heavy Strategic Investments in Technology and Manufacturing

The company is entering a capital-intensive phase focused on core technologies and manufacturing scale. Priority areas include batteries, in-house AI chip development, solar cell production, the Optimus humanoid robot, the CyberCab robotaxi platform, and the Tesla Semi. Tesla is advancing its own AI5 and AI6 chip projects to reduce reliance on external suppliers and secure compute capacity for autonomy and robotics. This vertical integration push is central to Tesla’s strategy but requires significant upfront spending and execution precision.

Deliveries Slide 16%, Hitting Volume-Leveraged Economics

Despite stronger margins, Tesla’s automotive business faced pressure from lower volumes. Vehicle deliveries fell 16% sequentially, undermining fixed-cost leverage and constraining revenue growth. The company managed to keep automotive gross profit flat, but the lower volume environment highlights the sensitivity of Tesla’s manufacturing economics to throughput and underscores the importance of resolving production bottlenecks, particularly in batteries.

Battery Pack Constraints Limit Growth

Battery supply remains the biggest bottleneck for Tesla’s operations. Management cited battery pack availability as the primary global constraint and described interim measures like using 4,680 cells in non-structural packs while engineers iterate on improvements. These workarounds help sustain production but reflect that key elements of Tesla’s battery strategy are still being scaled. Until pack availability materially improves, both vehicle and storage growth will be capped by supply rather than demand.

FSD Subscription Shift Adds Near-Term Margin Headwinds

The company reiterated that the transition from upfront FSD purchases to a subscription model will pressure margins in the short term. While this move should increase FSD adoption and create recurring revenue, it spreads income over the life of the subscription instead of recognizing it at the time of vehicle sale. Accounting aside, Tesla is effectively opting for longer-term, more predictable cash flows from a larger user base at the expense of immediate profit per car.

Operating Expenses Surge on Compensation and Future Bets

Operating expenses jumped by roughly $500 million sequentially in the fourth quarter, driven mainly by higher stock-based compensation and a charge tied to a 2025 performance award. Management signaled that elevated spending — particularly in AI and new products — will likely continue through 2026. For investors, this means Tesla is deliberately allowing operating leverage to move against it as it prioritizes long-term technology leadership over near-term earnings optimization.

Service Margin Compression from Scaling the Network

Tesla’s services and other segment saw margins slip from 10.5% to 8.8%, as investments in people and infrastructure outpaced revenue. The company cited higher employee-related costs to prepare service centers for expected fleet growth. While this weighs on current profitability, it is part of building the support network needed to handle a larger and increasingly global vehicle and energy footprint.

Bitcoin and FX Weigh on Net Income

Below the operating line, Tesla’s reported net income was hit by non-core financial items. A 23% quarter-over-quarter depreciation in a Bitcoin holding led to a markdown, while unfavorable foreign exchange movements tied to large intercompany borrowings further pressured earnings. These factors do not alter the operating trajectory but add another layer of volatility to reported net results.

Energy Faces Margin Pressure from Competition and Policy

Despite strong growth, Tesla does not expect energy margins to expand smoothly from here. Management warned of margin compression driven by intensified low-cost competition, policy uncertainty in key markets, and tariff-related costs. While backlog and new products support volume growth, the pricing environment may become more challenging, suggesting that energy’s contribution to profit could be choppier than recent results imply.

Massive CapEx Plan Raises Cash Burn and Funding Questions

Perhaps the most consequential theme for investors was Tesla’s sharply higher capital spending outlook. The company now expects 2026 CapEx to exceed $20 billion, more than doubling its earlier guidance for the prior period of around $9 billion. The funds will support six new or expanded factories and massive AI-compute buildouts. Even with over $44 billion in cash and investments, this scale of spending materially increases cash burn risk and could ultimately require external financing. Management framed this as a necessary surge in investment to secure future capacity and technology advantages.

Ambitious but Risky Optimus Robot Ramp

Tesla’s Optimus humanoid robot remains one of its boldest bets. The company is aiming to convert its Fremont facility for large-scale Optimus production, targeting a long-term run rate of around 1 million units per year. However, management cautioned that Optimus will follow a stretched S-curve, as it requires an almost entirely new supply chain and manufacturing ecosystem. Meaningful production volume is not expected until late in the year, making Optimus a high-upside but high-execution-risk project that will consume significant capital and engineering resources before contributing meaningfully to earnings.

Guidance: Aggressive Investment Phase With Autonomy at the Center

Looking ahead, Tesla guided to an aggressive 2026 investment phase, with CapEx expected to exceed $20 billion to fund six new factories, major AI compute, and large-scale ramps in products like CyberCab, Semi, energy systems, and Optimus. The company enters this period with $44+ billion in cash and investments and Q4 free cash flow of $1.4 billion, but also with rising operating expenses and episodic hits to net income from items like digital asset revaluations and FX. Tesla expects automotive margins to benefit from recent gains (17.9% ex-credits) and total gross margin above 20%, while acknowledging pressure in services and energy margins. On the product roadmap, Tesla is guiding for continued growth in its nearly $12.8 billion energy business, further expansion of FSD subscriptions from the current ~1.1 million paid users, and a major push in autonomy, including expectations for fully autonomous vehicles across a meaningful portion of the U.S. by year-end and a long-term Optimus production target of around 1 million units annually.

Tesla’s earnings call painted the picture of a company doubling down on its long-term vision even as near-term metrics turn more volatile. Margins and energy results improved, robotaxis and autonomy are moving from theory to real-world deployment, and FSD adoption is scaling. But lower deliveries, rising costs, and a massive CapEx ramp raise execution and funding risks. For investors, Tesla is increasingly a bet not just on EVs, but on a broader ecosystem of software, energy, AI, and robotics — one that could yield substantial rewards if the company delivers, but with a growing capital and risk profile that will demand close scrutiny in the quarters ahead.