Tesla Trims CapEx as Cash Surges Ahead of SpaceX Tie-Up

Key Moments

Spending Pullback Fuels Cash Flow Surprise

Tesla (NASDAQ:TSLA) reduced its full-year capital expenditure forecast by 20% and delivered an unexpected positive free cash flow outcome in the third quarter, after deploying far less capital into its artificial intelligence and robotics initiatives than the market had anticipated.

The cash generation comes at a pivotal time for the electric-vehicle maker, as CEO Elon Musk considers combining Tesla with his substantially more capital-intensive space venture, SpaceX.

While the reduced investment profile bolsters Tesla’s balance sheet ahead of any potential transaction, investors are weighing whether conserving cash at the cost of spending on AI, robotaxis and humanoid robots could weaken the longer-term growth narrative that underpins the stock.

Initially, Tesla shares rose 2% in after-hours trading after the company reported positive free cash flow, stronger gross margin and revenue that exceeded market expectations. Those gains quickly reversed, and the stock traded down 2%. Tesla shares have declined about 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 ETFs tied to Tesla. “Lower capex suggests less of an ’all-in’ approach to the AI arms race than one would expect from Elon.”

Capex Guidance Reduced, Allocation Still Unclear

Tesla now expects capital expenditures in 2026 to total roughly $20 billion, down from a previous projection of more than $25 billion. The company did not specify which projects or business lines would see reduced spending under the updated outlook.

For the quarter ended September 30, Tesla invested $4.7 billion in capex, twice the level of a year earlier but significantly below the $7.5 billion analysts on average had modeled, according to LSEG data. That lower spending helped Tesla generate free cash flow of $1.53 billion, in sharp contrast to expectations for a $4.92 billion cash burn.

Potential Tesla-SpaceX Merger Under Review

Musk said on Tuesday that a merger between Tesla and SpaceX was a “good idea” and noted that both companies had established special committees to examine a possible deal. On Wednesday, he told analysts on a conference call that he had nothing further to add on the subject.

A combined entity would sit at the core of Musk’s broader strategy: a unified technology and manufacturing platform spanning AI, energy, robotics, communications and transportation both on Earth and beyond.

Investors, however, are likely to scrutinize whether Tesla is committing sufficient capital to turn Musk’s technology ambitions into profitable businesses, particularly as the rollout of robotaxis trails his prior timelines. Tesla’s energy segment has recently provided some balance to the performance of its auto operations, which face ongoing competitive pressure as global rivals introduce newer and often lower-priced models. Tesla’s lineup still relies heavily on the aging Model 3 and Model Y.

“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 Holds Steady as Profits Slide

Revenue for the quarter was unchanged from the same period a year ago, even after U.S. tax credits that aided prior-year sales expired. That flat top-line performance was still sufficient to beat Wall Street estimates. Net income declined 43% from a year earlier.

Tesla said in a statement that it closed the quarter with the largest backlog for its passenger vehicles in four years. Elevated gasoline prices have lifted demand for electric vehicles, particularly in Europe.

With 486,532 vehicles delivered in the third quarter, Tesla is on pace to increase annual vehicle 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 Margin Performance

Tesla reported that the FSD (supervised) attach rate surpassed three-quarters of new vehicle deliveries in North America, representing a nearly 20-percentage-point increase from the second quarter.

Automotive gross margin, excluding regulatory credits, was 18.1% in the third quarter, above analysts’ expectations of 16.7%, according to Visible Alpha data.

Long-Term Production Ambitions

Tesla said it is targeting annual production of 5 million vehicles by about 2030, compared with an expected 2.5 million vehicles this year. How aggressively the company chooses to invest toward that goal – particularly amid a potential merger discussion with SpaceX – is now a central focus for investors evaluating Tesla’s next phase of growth.