October 22, 2026
| Q3, three months to Sept 30 | 2026 | 2025 |
|---|---|---|
| Automotive gross margin, excluding credits | 18.1% | 15.4% |
| Gross profit | $5.49 billion | $5.05 billion |
| Operating expenses | $4.78 billion | $3.43 billion |
| Income from operations | $718 million | $1.62 billion |
| Free cash flow | $1.53 billion | $3.99 billion |
| Deliveries | 486,532 | 497,099 |
Source: the company’s third-quarter 2026 update, October 21, 2026.
The cars earned a wider margin
Tesla’s cars earned a wider margin in the third quarter than a year earlier, and the company still made less than half the operating profit. Its third-quarter update puts the automotive margin, excluding regulatory credits, almost three points higher. In July GCBC read the second quarter’s automotive margin as a trough; it has since recovered by almost two points.
Regulatory credits brought in $113 million, down from $417 million, so the gain came from the cars themselves. Tesla’s own account credits a better mix of regions and models, partly offset by lower average prices.
The spending took the profit
Operating expenses rose $1.35 billion from a year earlier, about three times the $440 million gain in gross profit. Tesla’s walk of the year-over-year change names the cause first: “operating expenses driven by SI and other R&D projects, SBC (including 2025 CEO Performance Award) and SG&A.” SI is Tesla’s name for its artificial-intelligence work, and SBC is stock-based compensation.
Research and development cost $2.76 billion, up 69%. The update says Tesla plans 400 megawatts of AI training compute by the end of the year and has started Optimus robot production on high-volume lines in Fremont. Stock-based compensation, which includes the chief executive’s 2025 performance award, rose to $1.17 billion from $663 million.
Operating margin fell to 2.6% from 5.8%. Capital spending more than doubled from a year earlier, and free cash flow returned to positive after a negative second quarter, at about two-fifths of last year’s level.
Batteries, Tesla says, not buyers
Batteries, Tesla says, held back its vehicle volume: availability “continued to be the limiting factor in increasing auto volumes,” and the company ended September with what it calls “the largest backlog for our passenger vehicles in four years.” Deliveries fell 2% from a year earlier while production rose 4%. Global inventory stood at 11 days of supply against 10 a year earlier, so cars are not piling up on lots.
Active FSD subscriptions, a count that includes upfront purchases, reached 1.74 million from 1.04 million, and Tesla’s walk credits them for higher ancillary sales. The software is also spreading in Europe one country at a time: the update says FSD (Supervised), which requires an attentive driver, is now approved in nine EU countries, ahead of an EU-wide vote that September reporting put no earlier than December.
ACEA’s September registrations show where some of the demand is coming from: Tesla’s EU registrations rose 78.6% from a year earlier, to 45,866.
What to watch
Tesla’s fourth-quarter production and deliveries report, due in early January, is the first test of the battery claim: a supply-limited company with its largest backlog in four years should deliver more as cells arrive. The second number is operating expenses, which have risen every quarter this year, from $3.78 billion in the first to $4.78 billion in the third. If they keep outrunning gross profit, a better car margin will not show up in Tesla’s operating profit.
