Tesla reports $1.53 bn in free cash flow amid one-fifth cut to 2026 spending forecast

Tesla cuts 2026 capex by one fifth

Tesla reported an unexpected $1.53 billion in free cash flow in the third quarter, beating Wall Street's expectations, as the electric vehicle maker spent less than anticipated on capital expenditure.However, a one-fifth cut to its 2026 spending forecast has raised questions about its investment plans for artificial intelligence (AI), robotics and autonomous driving. The company now expects capital expenditure of around $20 billion in 2026, down from its earlier forecast of more than $25 billion. Tesla did not specify which areas would see lower spending.In the quarter ended September 30, Tesla spent $4.7 billion on capital expenditure, double the amount spent a year earlier but well below the $7.5 billion analysts had expected on average, according to LSEG data.The lower spending helped Tesla report free cash flow of $1.53 billion, compared with market expectations of a cash outflow of $4.92 billion.Tesla's shares initially rose 2% in after-hours trading after the results, supported by positive free cash flow, higher gross margins and revenue that exceeded Wall Street expectations. However, the stock reversed direction to trade 2% lower. Shares have fallen around 14% this year.

"The free cash flow beat was a pleasant surprise, but when combined with the lower-than-expected capex, raises questions on the next step for the automaker," said Ryan Lee, senior vice president of product and strategy at Direxion, which offers exchange-traded funds tied to Tesla. "Lower capex suggests less of an 'all-in' approach to the AI arms race than one would expect from Elon."

SpaceX merger puts Tesla's spending under scrutiny

The results come as chief executive Elon Musk explores a potential combination of Tesla and SpaceX, his space venture.

The unexpected cash generation could strengthen Tesla's financial position ahead of a possible deal, but lower investment in AI, robotaxis and humanoid robots could raise concerns about its ability to deliver on its growth ambitions.On Tuesday, Musk described a merger between the two companies as a "good idea" and said they had formed special committees to discuss the proposal. He declined to provide further details during Wednesday's conference call with analysts.A combination would bring together businesses central to Musk's long-term vision of an integrated technology and manufacturing group spanning AI, energy, robotics, communications and transportation on Earth and beyond.However, investors will want to see whether Tesla is investing enough to turn Musk's ambitions into commercial businesses, particularly as the robotaxi rollout has lagged behind his promises."The merger still faces a high bar, but tonight’s numbers make the financial logic harder to ignore," said Thomas Monteiro, a senior analyst at Investing.com."The main takeaway is that Tesla's surprisingly positive cash flow quarter did not come from stronger profits, but from spending billions less than planned at a time when SpaceX is preparing to invest up to $40 billion in a single quarter."

Revenue beats estimates, but net income plunges 43%

Tesla's financial performance presented a mixed picture.

Revenue remained flat compared with a year earlier, despite the end of US tax credits that had supported sales in the previous year. Nevertheless, the figure exceeded Wall Street's expectations.Net income fell 43% during the quarter.Tesla said it had ended the quarter with its largest backlog of passenger vehicles in four years. Higher petrol prices have supported demand for electric vehicles, particularly in Europe.The company delivered 486,532 vehicles in the third quarter, putting it on track to increase annual deliveries for the first time in three years."Demand is growing rapidly for our vehicles. It's exceeding our production by a significant margin," Musk said on the conference call with analysts. "In a nutshell, after many years of sort of grind and things being fairly flat, I think we're now headed for a lot of fun and significant growth."

FSD adoption and automotive margins improve

Tesla also reported stronger adoption of its driver-assistance technology in North America. The FSD (supervised) attach rate exceeded three-quarters of new vehicle deliveries, an increase of nearly 20 percentage points from the second quarter, the company said.Automotive gross margin, excluding regulatory credits, reached 18.1% in the third quarter, above analysts' estimate of 16.7%, according to Visible Alpha data.Tesla's energy business has recently helped offset pressures on its automotive operations. The latter remain under scrutiny as competitors worldwide launch newer, often cheaper models. Tesla continues to rely heavily on its ageing Model 3 and Model Y.Despite the competitive pressures, Tesla aims to produce five million vehicles annually by around 2030, compared with an expected 2.5 million this year.