Tesla sells more cars but makes less money: Why Musk’s AI pivot is squeezing profits

Tesla is delivering more vehicles than ever. It is also earning less from them.

The electric-vehicle maker reported record second-quarter deliveries of 480,126 vehicles, lifting revenue 26 per cent to $28.2 billion. But adjusted net income fell 17 per cent to $1.2 billion, well short of Wall Street’s expectation of $1.95 billion.

The figures underscore the dilemma facing Tesla and chief executive Elon Musk. The company’s core auto business is recovering in volume terms, but profitability is under pressure at the same time Musk is committing billions of dollars to a sweeping pivot into artificial intelligence, autonomous vehicles, semiconductors and humanoid robots.

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Tesla shares fell more than 2 per cent in after-hours trading after the results.

Record deliveries, weaker profits

Tesla’s second-quarter deliveries rose sharply from 384,122 vehicles a year earlier. Deliveries also exceeded production by more than 28,000 units, helping the company work through an inventory build-up earlier in the year.

But the stronger sales volume came at a cost.

Tesla has been leaning on discounts and more attractive financing offers to keep demand moving, particularly in the United States, where sales have been hit by the removal of a $7,500 consumer tax credit for electric vehicles.

That pressure showed up in the margins.

Tesla’s automotive margin, excluding regulatory credits, came in at 16.3 per cent, below analysts’ forecast of 18.7 per cent. Its overall operating margin fell to 1.4 per cent from 4.1 per cent a year earlier.

RBC Capital Markets analyst Tom Narayan said the margin decline reflected weaker pricing, which likely helped Tesla post the stronger delivery numbers.

The result is a familiar but increasingly uncomfortable trade-off for Tesla: more cars sold, but at lower profitability.

The disappearing regulatory-credit cushion

Tesla has also lost another important source of high-margin income.

Revenue from regulatory credits fell sharply to $146 million from $439 million a year earlier. Tesla sells these credits to other automakers that need them to meet emissions requirements.

The drop followed the Trump administration’s rollback of climate regulations and incentives that had supported electric-vehicle production.

For years, regulatory-credit sales gave Tesla a lucrative revenue stream that required little additional production. With that cushion now shrinking, the company has less room to absorb lower vehicle prices and rising costs.

The combination of weaker average selling prices and the decline in credit revenue has put further pressure on Tesla’s automotive margins.

Musk’s expensive AI bet

The strain on Tesla’s core business comes as Musk is accelerating spending on ventures that could eventually redefine the company.

Tesla more than doubled capital expenditure from a year earlier. Spending rose 142 per cent to $5.79 billion in the second quarter.

Musk has raised Tesla’s spending plans for 2026 to more than $25 billion, nearly triple the $8.5 billion invested last year.

The money is being directed towards artificial intelligence infrastructure, autonomous driving, robotaxis, semiconductor technology and humanoid robots.

Tesla is building a chips research facility tied to its Terafab joint venture with SpaceX. It is also investing in advanced semiconductors and power-grid infrastructure for the Cortex 2 supercomputer cluster.

The company has begun production of its fully autonomous Cybercab EV and is expanding its robotaxi service in parts of Texas and Florida.

“This is a massive capex year, but I'm confident that all the things that we are investing in will yield incredible returns,” Musk told analysts on the post-earnings call.

For now, those returns remain more promise than reality.

Tesla reported negative free cash flow of $1.1 billion in the quarter, its first quarterly cash burn in more than two years. Chief financial officer Vaibhav Taneja warned that free cash flow could turn more negative in the second half of the year as spending on AI infrastructure and manufacturing capacity rises.

“We are in a big investment cycle,” Taneja said, adding that operating expenses, largely driven by research and development, would continue to increase.

Tesla is becoming more than an automaker

The strategic shift is now unmistakable.

Tesla’s automotive business still accounts for more than 70 per cent of revenue. But Musk is increasingly asking investors to value the company on its potential in AI, autonomous driving and robotics rather than simply on vehicle sales.

That creates a widening gap between the business Tesla has today and the company Musk says it can become.

The auto business remains the main source of revenue. Yet Tesla is spending heavily to build technologies that could eventually open entirely new revenue streams.

The robotaxi business sits at the centre of that vision. Even so, Tesla’s autonomous fleet remains limited to a handful of markets in Texas and Florida, with services often restricted to specific areas outside major city centres.

Musk offered little fresh detail on the pace of expansion during the earnings call. Tesla AI chief Ashok Elluswamy said the company had seen double-digit growth in fully autonomous miles without safety monitors and expected that trend to continue.

Musk, however, struck a more cautious note, warning that any serious incident involving a robotaxi could draw global attention and trigger regulatory action.

That caution sits uneasily alongside his earlier, far more aggressive predictions about the speed of Tesla’s robotaxi rollout.

Europe provides some relief

Tesla has found some support from a rebound in electric-vehicle demand in Europe.

Higher fuel prices have encouraged some buyers back into EV showrooms, helping Tesla recover after a difficult stretch.

The company suffered a sharp sales decline last year as Musk’s political activity alienated some consumers. It is now trying to regain market share amid intensifying competition from Chinese electric-vehicle makers.

Tesla is also seeking broader approval for its Full Self-Driving system in Europe, which it sees as important to future growth in the region.

But regulatory scrutiny remains a constant. Tesla continues to face questions over its self-driving technology, as well as the safety claims it has presented to European regulators.

The cash-flow problem investors are watching

For investors, Tesla’s most immediate problem may not be delivery growth. It is the rising cost of funding the company’s future ambitions.

Tesla plans to spend more than $25 billion in 2026. Taneja has said capital expenditure will continue to rise over the next two to three years.

That suggests Tesla could remain in a prolonged investment phase even as automotive margins stay under pressure.

“Monetization remains the central concern following the earnings miss,” said Ryan Lee, senior vice president of product and strategy at Direxion. “The question is how quickly those investments can begin supporting the valuation.”

That question is becoming harder to ignore.

Tesla is now straddling two very different businesses. One is a mature electric-vehicle operation facing pricing pressure, tougher competition and the loss of regulatory-credit revenue. The other is a high-cost wager on AI, autonomous driving and robotics that could transform the company, but only after years of heavy spending.

For now, Tesla is selling more cars but making less money on each one.

The second-quarter results suggest the transition from carmaker to AI and robotics company will be expensive. And until Musk’s future bets begin producing meaningful revenue, Tesla’s investors may have to accept that the cost of the pivot is being borne by the company’s traditional auto business.

With inputs from agencies.