Tesla: Relying on the Stars and the Sea, It's Time to Pay for Faith Again

$Tesla(TSLA.US) On the early morning of October 23rd, Beijing time, Tesla released its Q3 2025 earnings report after the U.S. stock market closed. In summary, the third-quarter performance was decent, but Tesla is a stock priced for the future, especially at the current relatively high price of $439. Tesla's guidance on several key businesses is not optimistic. Here are the core details:

1. Total revenue performance was good: This quarter's total revenue was $28.1 billion, exceeding the market expectation of $27.2 billion. Revenue from energy and service businesses both increased quarter-on-quarter, while the core automotive revenue continued to recover. The automotive revenue slightly exceeded market expectations due to stable vehicle selling prices quarter-on-quarter.

2. Automotive revenue performance was good: This quarter's automotive revenue was $21.2 billion, slightly exceeding the market expectation of $20.9 billion, mainly due to the vehicle selling price remaining stable quarter-on-quarter, contrary to market expectations of a decline.

Tesla raised the prices of Model S/X in the U.S. and launched a higher-priced Model Y L version in China, offsetting discounts on inventory Model 3/Y and loan discount offers in various regions.

3. Core automotive gross margin (excluding carbon credits) also improved quarter-on-quarter: This quarter's core automotive gross margin (excluding carbon credits) rose from 15% last quarter to 15.4% this quarter. The increase in vehicle sales volume offset the negative impact of tariffs, resulting in a gross margin (excluding carbon credits) that was in line with market expectations.

4. R&D expenses and capital expenditures continue to invest heavily in AI's vast business: Tesla's R&D expenses and sales expenses continued to increase this quarter, with R&D expenses at $1.63 billion, higher than the market expectation of $1.54 billion, due to increased investment in AI intelligence. Tesla granted equity incentives to employees involved in AI projects, and R&D expenses were mainly used for HW5.0 chips, Robotaxi, and Optimus investments. Tesla also guided that R&D expenses will continue to increase in the future.

Although capital expenditures slightly decreased quarter-on-quarter, Tesla guided that this year's capital expenditures will reach $9 billion, implying a fourth-quarter capital expenditure of $2.87 billion, an increase of $620 million from this quarter's $2.25 billion, preparing for the significant iteration of FSD functionality and the commercial expansion of Robotaxi. Capital expenditure guidance for 2026 is expected to increase significantly.

Dolphin Research's overall view:

Overall, regarding Tesla's third-quarter performance, the overall performance was decent, with total revenue and total gross margin exceeding market expectations. However, net profit was slightly below market expectations due to increased expenses (mainly increased AI investment and restructuring costs) and reduced recognition of other income.

Since the second-quarter report, Tesla's stock price has reached a high of $442, already pricing in: ① The third-quarter's better-than-expected vehicle sales; ② The normal launch and service expansion of the Robotaxi business, and the release of FSD V14 in North America; ③ Tesla's board proposed a $1 trillion compensation plan for Musk, affecting Tesla and Musk's interests; ③ The expectation of Optimus's imminent mass production, so the market has high expectations for Tesla's quarterly performance and the vast business.

Therefore, at this relatively high stock price, it is more important to look at Tesla's expectations from the market's perspective:

1) On the basic automotive front: Fourth-quarter vehicle sales and gross margin may face a continued downward trend quarter-on-quarter

a. The $7,500 U.S. IRA subsidy officially declines in the fourth quarter, and U.S. demand enters a weak period: The $7,500 IRA subsidy under the U.S. Inflation Reduction Act ended on September 30th, and Tesla's measures in response to the decline include:

Tesla chose to raise lease prices rather than direct price increases: The monthly lease for Model Y increased from $479-$529 to $529-$599; the monthly lease for Model 3 increased from $349-$699 to $429-$759.

Launch of reduced configuration versions of Model 3/Y: The starting price for the Model 3 Standard version dropped to $36,990, and the Model Y Standard version dropped to $39,990, 10%-15% lower than previous entry-level prices.

Therefore, stabilizing fourth-quarter and 2026 vehicle sales heavily relies on Tesla's previously emphasized affordable Model 2.5.

b. The affordable Model 2.5 has been confirmed canceled: Tesla mentioned in last quarter's earnings call that Model 2.5 would start mass production in the fourth quarter, but this report did not mention this model. Dolphin Research believes the reduced configuration Model 3/Y has replaced the affordable Model 2.5 plan, and Tesla's focus has shifted entirely to betting on the future of Robotaxi and Optimus.

Currently, the market expects Tesla's 2025 delivery volume to be around 1.65 million units, with fourth-quarter deliveries expected to be 420,000-440,000 units, compared to 497,000 units in the third quarter, continuing to decline quarter-on-quarter. With the affordable Model 2.5 confirmed canceled, the 2025 delivery volume expectation is likely to be further downgraded.

Additionally, due to the quarter-on-quarter decline in fourth-quarter sales, the continued decline in pure gross margin carbon credits, and the impact of tariff costs on vehicle sales, the fourth-quarter Tesla vehicle gross margin is expected to continue to be under pressure.

Regarding the vast business guidance:

1) Robotaxi/FSD business: Guidance progress is basically in line with expectations

Tesla guides that Robotaxi will achieve operation without safety personnel in Austin this year, planning to launch Robotaxi services in about 8-10 states by the end of the year, basically in line with market expectations.

Tesla's Robotaxi operation range is steadily advancing, rapidly expanding from Austin to the Bay Area, Nevada, and Arizona, with the operation area in Austin doubling from 79 square miles to 173 square miles, and the fleet size expanding from the initial 20 vehicles to hundreds. Tesla's internal goal is to achieve a trial operation fleet of 1,000 vehicles by the end of the year, with significant impact expected on the report side in the second half of next year.

a. FSD business: FSD V14 has been launched in North America, but the paid penetration rate remains low

In the FSD business, Tesla has launched FSD V14 in North America, with model parameters expanded tenfold. Although the hardware is still based on HW 4.0, there are further improvements in fluency, scene understanding, and autonomous decision-making. In actual evaluations, V14 has reached a high level in basic vehicle control capabilities (such as lane changes and obstacle avoidance), but the new version has some minor bugs; subsequent iterations (such as V14.1, V14.2) are quickly fixing issues.

Tesla mentioned in this earnings call that paid FSD customers account for about 12% of the existing fleet, with the paid penetration rate still relatively low, and FSD revenue recognition this quarter is still on a year-on-year decline compared to last year. Tesla is also working with regulatory agencies in China and Europe to obtain FSD operation approval.

2) Optimus business: Prototype release and mass production delayed again

The market originally expected Tesla to launch the Optimus 3.0 prototype (around November) in Q4 and start a small batch production plan, but Tesla delayed the release of the Optimus 3.0 prototype again in this earnings call, now expected to be released in Q1 next year, and the original plan for mass production in early 2026 has been postponed to the end of 2026, with a million-unit Optimus production line to be built by the end of next year.

Therefore, Dolphin Research believes that the current stock price of $439 has reached a historical high level, with high market expectations for Tesla's quarterly performance and vast business, and the AI business valuation is relatively full.

However, the guidance for several key businesses in this earnings call is not very optimistic: The cancellation of the affordable Model 2.5 project brings significant pressure on the automotive fundamentals in the fourth quarter, and the delay in the release and mass production of the Optimus business is undoubtedly another setback for the expected business, so Tesla's stock price may experience some correction after this earnings call.

However, as Tesla increasingly shifts from an automotive company to an AI company, the core focus should still be on the shareholder meeting on November 6th regarding Musk's compensation plan. If Musk's compensation plan is approved, and more AI-related progress is released, combined with interest rate cut expectations, Tesla's stock price may continue to rise after the correction in this earnings call.

But once it continues to rise to around $500, Dolphin Research believes that the focus of trading Tesla should be on risks, especially the high probability of continued deterioration in Tesla's automotive fundamentals in the fourth quarter, and the possibility of delays in the Robotaxi/Optimus business progress.

Below is a detailed analysis of the earnings report

I. Tesla: Overall decent revenue performance

1.1 Automotive revenue: Finally returning to year-on-year positive growth

This quarter's total revenue was $28.1 billion, exceeding the market expectation of $27.2 billion, and the core automotive revenue showed a slightly better-than-expected state.

Specifically:

In the automotive business, this quarter's total revenue was $21.2 billion, higher than the market expectation of $20.9 billion, continuing to rise quarter-on-quarter. Carbon credit revenue was lower than expected due to policy factors, which was anticipated (Tesla had guided in last quarter's earnings call that due to changes in carbon emission regulations, carbon credit revenue expectations would decline in the coming quarters).

However, in the market's most concerned areas of excluding carbon credits and lease revenue, this quarter's real automotive sales were $20.4 billion, higher than the market expectation of $20 billion, mainly due to better-than-expected vehicle selling prices. The market originally expected Tesla's third-quarter automotive revenue to show a quarter-on-quarter decline, but the actual performance showed that vehicle selling prices remained stable quarter-on-quarter.

Dolphin Research believes this is mainly due to Tesla raising the prices of Model S/X in the U.S. and launching a higher-priced Model Y L version in China, offsetting discounts on inventory Model 3/Y and loan discount offers in various regions.

In the energy business, this quarter's energy business revenue was $3.4 billion, up 22% quarter-on-quarter, mainly due to the favorable outlook for the energy storage business, with the Powerwall product driving a 30% quarter-on-quarter increase in energy storage shipments to 12.5 GWh. The commissioning of Tesla's Shanghai 20 GWh factory also supported the release of energy storage shipments this quarter.

In the service business, this quarter also performed well, with service revenue of $3.4 billion in the third quarter, up $400 million quarter-on-quarter, mainly due to increased revenue from insurance and service center businesses.

1.2 Automotive gross margin basically meets expectations

Every earnings report, more important than revenue, and the real incremental information during the earnings report is always the performance of automotive gross margin.

Overall automotive gross margin fell from 17.2% last quarter to 17% this quarter, mainly due to the reduced contribution of pure gross margin carbon credits. However, the core automotive gross margin excluding carbon credits showed a quarter-on-quarter recovery, rising from 15% last quarter to 15.4% this quarter, basically meeting expectations.

In other businesses, the energy business gross margin reached 31%, up 1 percentage point quarter-on-quarter, higher than the market expectation of 27%. Tesla's energy business uses LFP batteries mainly from China, which are significantly affected by tariffs, so the market expected a quarter-on-quarter decline in gross margin. However, the increased capacity of Tesla's Shanghai factory helped Tesla avoid tariff impacts to some extent, with the Shanghai factory meeting non-U.S. market demand.

In the service business, this quarter's gross margin was 11%, up 5 percentage points quarter-on-quarter, also significantly exceeding the market expectation of 6%, mainly due to the continued expansion of Tesla's supercharging network driving gross margin improvement, as well as improvements in insurance and service center business gross margins.

II. Automotive fundamentals were decent in the third quarter

As the most important observation indicator every quarter, automotive gross margin is extremely important, especially in the current situation where Tesla's existing models are aging and competition is intensifying.

To clearly see the real situation of automotive gross margin, Dolphin Research separately broke down the automotive sales gross margin excluding carbon credits, automotive lease gross margin, and overall automotive business gross margin.

Since the automotive lease business is small and its gross margin is stable, the overall automotive gross margin is a combination of the two. Breaking it down so carefully is mainly to observe the automotive sales gross margin excluding carbon credits.

The third-quarter automotive sales gross margin (excluding carbon credits and leases) was 15.4%, basically meeting market expectations, rising 0.4 percentage points quarter-on-quarter, mainly due to the release of scale effects this quarter, offsetting the adverse impact of tariffs.

Let's break it down from the perspective of single vehicle economics:

2.1 Vehicle selling price remained stable quarter-on-quarter

From the vehicle selling price perspective, in the third quarter, Tesla's revenue per vehicle sold (excluding carbon credits and automotive lease sales) was $41,800, remaining stable quarter-on-quarter, contrary to market expectations of a continued quarter-on-quarter decline.

a. U.S.: Due to strong demand in the third quarter, the prices of Model S/X were raised, but discounts were offered on inventory Model Y/Model 3

In the third quarter, the U.S. market saw a rush to buy before the IRA subsidy decline, with demand still strong. Tesla raised the prices of Model S/X but offered discounts of up to $2,000 on inventory Model Y/Model 3.

At the same time, Tesla continued to offer 0% interest loans for Model 3 and provided 18 months of free supercharging services and other supercharging promotional packages in the U.S./Canada to support the release of U.S. market demand.

b. China: Launched a higher-priced Model Y L version while continuing subsidy offers

In China, although the prices of Model 3/Y did not change quarter-on-quarter, Tesla launched a higher-priced Model Y L version.

In terms of loan policies, Tesla continued last quarter's offer of a 5-year interest-free loan for Model Y, while Model 3 continued last quarter's offer of an 8,000 yuan insurance subsidy for all models, with rear-wheel/long-range versions combined with a 5-year interest-free policy. Additionally, other offers such as paint color choices and referral rewards were introduced.

c. Europe: The European market did not adjust the prices of Tesla Model 3/Y in the third quarter

3) FSD business: The number of paid FSD customers is still small, accounting for about 12% of the existing fleet. It is expected that there will be no major factors driving FSD deferred revenue recognition in the third quarter, with recognition scale remaining the same as the second quarter. Compared to last year's third quarter, FSD revenue recognition is still on a year-on-year decline, mainly due to the high base from new feature releases and Cybertruck-related FSD subscriptions last year.

Currently, there is no significant catalyst for large-scale recognition of FSD revenue, and substantial growth in this part of the revenue still requires significant iteration of Tesla's FSD technology and implementation in Europe and China.

2.2 Scale effects offset some negative tariff impacts, single vehicle costs have declined

After discussing vehicle prices, let's talk about single vehicle costs. Typically, Tesla's cost reduction comes from four dimensions—1) Scale dilution from sales release and full utilization of capacity; 2) Technological cost reduction; 3) Natural cost reduction of battery raw materials; 4) Government subsidies. Specifically:

Dolphin Research broke down single vehicle costs into single vehicle depreciation and single vehicle variable costs. The third-quarter single vehicle economic account is as follows:

1) Single vehicle depreciation effect: Single vehicle amortization costs are declining quarter-on-quarter

This quarter's single vehicle depreciation was $3,270, with an absolute value decline of $462 quarter-on-quarter, and the single vehicle amortization cost rate fell from 8.9% last quarter to 7.8% this quarter, a decline of 1.1 percentage points. Dolphin Research believes the decline in single vehicle depreciation this quarter is mainly due to:

Improved scale effects quarter-on-quarter: Tesla's vehicle sales volume in the third quarter was 497,000 units, a 29% increase from the second quarter's 384,000 units, leading to significant improvement in scale effects.

2) Single vehicle variable costs: Affected by tariffs, slightly increased

This quarter's single vehicle variable costs were $32,400, up $185 quarter-on-quarter, and the single vehicle variable cost rate also increased by 0.5 percentage points to 77.5% this quarter, mainly due to tariff impacts (Tesla faced over $400 million in negative tariff impacts this quarter, with the automotive business affected by over $200 million in tariffs).

Although the U.S.-China agreement reduced retaliatory tariff rates to 10% and will continue until early November, Tesla guides that the tariff impact due to the lag in sales accounting will be fully released in the coming quarters.

The U.S. raw material market may face additional tariff pressure: The expanded steel/aluminum tariffs in mid-August covered steel used in electric vehicle motors. Reports indicate that Tesla requested to exclude steel used in electric vehicle motors from the tariff list but was not approved.

3) Automotive gross margin slightly improved

Ultimately, the release of scale effects offset some negative tariff impacts, resulting in a slight quarter-on-quarter increase of 0.4 percentage points in this quarter's automotive gross margin (excluding carbon credits) to 15.4%.

III. How will Tesla's automotive fundamentals evolve in 2025?

3.1 Third-quarter delivery volume performed well due to the rush to buy before the U.S. IRA subsidy decline and the launch of Model Y L in China

Tesla's actual delivery volume in the third quarter was 497,000 units, significantly exceeding the sell-side expectation of 444,000 units and the buy-side expectation of 480,000 units. The higher-than-expected performance was mainly due to the rush to buy before the U.S. market IRA subsidy decline and the sales growth brought by the launch of Model Y L in China in September.

By region:

1) China market: Tesla launched the Model Y L three-row version in September, catering to the Chinese market's preference for large three-row SUVs, driving the recovery of Tesla's retail sales and market share in China.

2) U.S. market: Due to the rush to buy before the IRA subsidy decline (the federal tax credit of $7,500 for new energy vehicles will end on September 30, 2025, officially suspended from October 1, 2025), Tesla's sales in the U.S. also showed a significant quarter-on-quarter recovery trend

3) European market: The European market performed relatively average in the third quarter, mainly due to consumer avoidance of American products under the trade war and brand reputation damage caused by CEO Elon Musk's political involvement.

4) Other markets: Other markets also performed well this quarter, with record sales in key markets such as South Korea and Turkey.

3.2 However, fourth-quarter vehicle sales and gross margin are expected to remain under pressure

Due to the decline in the $7,500 U.S. IRA subsidy in the fourth quarter, U.S. demand will face significant pressure, and stabilizing fourth-quarter and 2026 vehicle sales heavily relies on Tesla's previously emphasized affordable Model 2.5.

Tesla mentioned in last quarter's earnings call that Model 2.5 would start mass production in the fourth quarter, but this report did not mention this model. Dolphin Research believes the reduced configuration Model 3/Y has replaced the affordable Model 2.5 plan, and Tesla's focus has shifted entirely to betting on the future of Robotaxi and Optimus.

IV. Expenditure side: AI business continues to increase investment

Tesla's R&D expenses and sales expenses continued to increase this quarter, with R&D expenses at $1.63 billion, higher than the market expectation of $1.54 billion, due to increased investment in AI intelligence. Tesla granted equity incentives to employees involved in AI projects, and R&D expenses were mainly used for HW5.0 chips, Robotaxi, and Optimus investments. Tesla also guided that R&D expenses will continue to increase in the future.

Sales and administrative expenses this quarter were $1.56 billion, significantly exceeding the market expectation of $1.39 billion, mainly due to an increase of $240 million in restructuring and other related expenses (cost reduction and efficiency improvement), as well as costs related to specific legal cases and shareholder meeting preparations.

Although the gross margin exceeded market expectations, due to increased expenses and reduced income from Bitcoin holdings and foreign exchange fluctuations, this quarter's net profit was $1.37 billion, below the market expectation of $1.43 billion, with a net profit margin attributable to the parent company of 4.9%, down 0.4 percentage points from 5.3% last quarter.

In terms of free cash flow, this quarter's operating cash flow increased by $3.7 billion to $6.24 billion due to reduced inventory, while capital expenditures continued to invest in AI business, with this quarter's capital expenditures at $2.25 billion. Tesla's Cortex training cluster reached a computing power level equivalent to 67,000 H100 units last quarter, and this quarter's Cortex training cluster reached a computing power level equivalent to 81,000 H100 units.

Tesla guides that this year's capital expenditures will reach $9 billion, implying a fourth-quarter capital expenditure of $2.87 billion, an increase of $620 million from this quarter's $2.25 billion, preparing for the significant iteration of FSD functionality and the commercial expansion of Robotaxi.