Tesla revealed unexpectedly positive free cash flow for the third quarter on Wednesday, largely due to spending significantly less on AI and robotics than analysts anticipated. This comes as the electric vehicle manufacturer considers a potential merger with CEO Elon Musk’s SpaceX.
This surprising cash flow might strengthen Tesla’s position as investors evaluate its worth in a possible merger. However, a substantial portion of Tesla’s valuation hinges on AI advancements, robotaxis, and humanoid robots. So, if the company focuses on conserving cash at the expense of these investments, it could jeopardize the very growth narrative that investors are counting on.
“The free cash flow surprise was a nice development, but along with the reduced capital expenditures, it raises questions regarding the automaker’s future direction,” noted Ryan Lee, senior vice president of product and strategy at Direxion, which provides ETFs linked to Tesla. “The lower capital expenditures suggest a less aggressive stance in the AI competition, which is not what one typically expects from Elon.”
Tesla’s stock dipped 1.8% in after-hours trading.
With capital expenditures reaching $4.7 billion, it remains more than double what they were a year ago but falls short of the $7.5 billion that analysts had predicted, according to data from LSEG.
The free cash flow for the September quarter stood at $1.53 billion, contrasting sharply with predictions of a cash outflow of $4.92 billion.
In addition, Tesla exceeded Wall Street’s revenue expectations for the third quarter, driven by an uptick in vehicle deliveries compared to the previous quarter.
Musk expressed on Tuesday that merging Tesla and SpaceX could be a “good idea” and mentioned that special committees have been established to explore the merger.
“The merger’s feasibility is still quite challenging, but the recent figures make the financial rationale increasingly difficult to overlook,” remarked Thomas Monteiro, a senior analyst at Investing.com.
Tesla logged a revenue of $28.05 billion for the three-month period concluding on September 30, surpassing the $27.88 billion analysts anticipated, even with the expiration of U.S. tax credits that previously boosted sales, particularly as high gasoline prices heightened interest in electric vehicles, especially in Europe.
“We concluded the quarter with our largest backlog for passenger vehicles in four years,” the company stated.
With 486,532 vehicles delivered in the third quarter, Tesla is poised to increase annual deliveries for the first time in three years.
The automotive gross margin, excluding regulatory credits, was reported at 18.1% for the third quarter, exceeding the analysts’ forecast of 16.7%, per Visible Alpha data.
Nonetheless, Tesla’s primary automotive sector is still under scrutiny, as competitors globally are unveiling newer and often more affordable models, while Tesla continues to rely heavily on the older Model 3 and Model Y. The automaker claims it has surpassed 10 million vehicles delivered, and the Model Y is expected to become the world’s top-selling vehicle this year.
To incentivize sales, Tesla has introduced more economical, stripped-down variants of both models and rolled out a six-seater Model Y in the U.S. back in July.
Investors are eager for tangible evidence that Musk’s ambitions in self-driving technology and robotics are moving towards actual commercial success.
The growth of Tesla’s fleet of robotaxis, including Cybercabs devoid of manual controls, has not met initial projections. The company started offering unsupervised robotaxi rides in Florida cities like Miami, Orlando, and Tampa in July, following earlier expansions in Dallas and Houston in April.
Additionally, Tesla’s energy division has become an essential component of its framework, supported by demand for large-scale batteries from renewable energy developers and data centers. The company has indicated that the existing tariff structure will impact its energy segment more severely than its automotive operations.
This year, Tesla’s shares have dropped roughly 14%. Nevertheless, it continues to hold its position as the world’s most valuable automaker by a significant margin, with a valuation of approximately $1.4 trillion, reflecting investor hopes that advancements in self-driving software, energy storage, robotaxis, and humanoid robots will ultimately generate higher-margin growth than vehicle sales.
