Tesla share price drops, as Musk’s vision and ideas lead to some skepticism

Tesla may have delivered a record number of cars in the third quarter, but this did not translate to higher earnings per share or net income. Although revenues for Q3 came in above estimates at $28.09bn, net income was $1.77bn, below the $1.9bn expected. This spooked a nervous market, and the share price is lower by more than 3% in after hours trading.

Free cash flow surges, but none of it will go to investors

The highlights from this earnings report included a stronger than expected gross margin of 18% vs. estimates of 17.2%, There was more good news: Tesla reported free cash flow that was better than analysts expected. The company generated free cash flow of $4bn last quarter, analysts expected just over $1bn. This was generated by an inventory clear-out, and it means that Tesla is now sitting on a $41.6bn cash pile.

This is a serious chunk of change, however, there were no investor sweeteners included in this earnings report. Tesla does not pay dividends, and it has never executed a share buyback programme, although it was apparently on the agenda back in 2022. Understanding why Tesla does not want to give back excess cash to shareholders, we need to understand Elon Musk’s mindset.

Tesla: the company of ideas

Elon Musk said that people should think of Tesla as a dozen startup companies in one. It is a car company, a super charger network provider, an AI powerhouse and the home of the Robotaxi, which could take our streets by storm in the coming decade. Thus, no wonder the stock price is volatile after this earnings report: anyone looking for Tesla to act like other blue chips will be disappointed. Tesla does not work on the model of sales, revenues, cash, buybacks repeat. Instead, it is a traditional growth company that runs on ideas. If you believe in the ideas of Elon Musk, then you should buy Tesla stock, if you don’t then you should avoid it.

The company is much more than a car manufacturer. Its energy generation and storage business saw revenues jump, and it is working with TSMC and Samsung to generate its latest AI chips.

Other snippets from this earnings report include: a $400mn hit to the business from President Trump’s tariffs, growing capex spending, and higher compensation packages in its AI business, as the global talent war rages on.

Holding out hope for the future

Tesla tends to give vague forward guidance, but it said that a refreshed model Y, and  a new cheaper version will rejuvenate sales and make up for any weakness caused by the expiration of the EV car credit in the US.

If you were wondering where Tesla spends its money, a fair chunk goes to Nvidia. The company announced that it has 81,000 Nvidia H100 GPUS at its data centre in Austin. This is powering Tesla’s AI ambitions, but these ambitions do not come cheap and it is why operating expenses surged 50% YoY last quarter.

This suggests that Musk is banking on more car sales, from cheaper models, alongside AI developments as the future revenue drivers for the company.

Robotaxi still in early stages of roll out

There is a lot of anticipation about the Robotaxi and the potential for its self driving technology to be a rich source of revenue growth in the future. Investors expected an update on this part of the business, and Musk mentioned that there are 20 robotaxis currently in operation in Austin, and 8-10 metro areas could be operating robotaxis by the end of this year, pending regulatory approvals. This is a start, but investors will want to see sustained growth in the rollout and any regulatory hurdles in the coming weeks could weigh further on the share price.

A Musk-designed robot could be our future

Humanoid robots are also in development, although Musk would not disclose if they were planning to make these a retail product in the future. He said that these robots are working in Tesla offices, showing guests around the building. This sounds expensive, and it is one of the many reasons why net income was disappointing and capex spend will be increasing.

Would you pay for Musk’s ideas to come to life?

In the current environment, where investors remain nervous about geopolitics and the global economic outlook, the vision and ideas that Musk is selling may not take off. Although these results had pockets of strength, including car sales and energy production, which is a highlight, the market may not be in the mood to pay to bring Musk’s ideas to life, which is why there has been a lukewarm reception to this report.

Key test coming up for the tech sector

So far in Q3, tech earnings have disappointed investors, Netflix’s share price fell by 10% on the back of its earnings report, and Tesla’s share price is also lower by more than 3% on Wednesday night. Next week’s tech earnings, which include the hyperscalers like Microsoft, Amazon, Meta and Google, will be a key market test. However, the weak reception for Netflix and Tesla suggest that the bar is high, and any tech company will need to pass this earnings test with flying colours as investors are starting to lose patience.

Overall, this earnings report will delight the Musk and Tesla enthusiasts, who may buy the dip in the share price on Thursday. However, Musk is likely to have failed to make progress to persuade less enthusiastic investors, who would rather Musk did a bit less thinking and a lot more production.