Tesla's record quarter costs $71bn after Musk spending spree. Is there a silver lining?

Tesla Inc (NASDAQ:TSLA) managed the unusual feat of selling more cars than ever before and being punished for it, with shares falling 4% after hours and wiping roughly $71 billion from the electric carmaker’s value.

Start with the good, because there genuinely is some. Revenue of $28.24 billion was up 26% year-on-year and comfortably ahead of the $25.71 billion analysts had pencilled in.

Deliveries of 480,126 vehicles were a second-quarter record and the first annual growth in two years, ending a slump driven by Chinese competition and a consumer backlash against Elon Musk’s politics.

The services division, which includes out-of-warranty repairs, grew revenue 50% to $4.58 billion at record margins, a reminder that the most boring part of the business is quietly among the healthiest.

Subscriptions to Full Self-Driving, which despite the name still requires a human ready to grab the wheel, rose 56% to 1.48 million, generating $791 million of annual recurring revenue.

Chief financial officer Vaibhav Taneja said the company left the quarter with its biggest order backlog since 2023.

Now the bad. Adjusted earnings of 33 cents a share came in barely two-thirds of the 51 cents Wall Street expected.

Gross margin fell to 16.8%, against forecasts of 19.4%, as average selling prices dropped and revenue from selling regulatory credits to rival carmakers collapsed from $439 million to $146 million.

That last line matters more than it looks, because those credits were nearly pure profit and are not coming back.

Tesla is now selling cheaper Model 3 and Y variants after retiring the pricier Model S and X, which is a fine way to move metal and a poor way to defend margins.

Operating expenses rose 47% to $4.35 billion, roughly twice the pace of revenue growth, dragging operating margin down to 1.4% from 4.1%.

Then the ugly, or at least the expensive.

Capital expenditure jumped 142% to $5.79 billion and free cash flow swung to a deficit of $1.09 billion, from a $146 million surplus a year earlier.

Taneja has guided to more than $25 billion of capex this year, close to three times the 2025 figure, and warned that operating costs will keep climbing into 2027.

In fairness to Tesla, the burn was smaller than the $3.6 billion analysts had feared, which is the sort of consolation prize that only makes sense in this stock.

The money is going into artificial intelligence compute, six new factories, Optimus humanoid robot lines at Fremont, and Terafab, a semiconductor project run jointly with SpaceX.

Musk described Optimus as the hardest product Tesla has ever tried to manufacture, noting there is no existing supply chain for it, which is true and also not obviously reassuring.

None of it generates revenue yet, and Musk has conceded robotaxi income will not become meaningful until 2027.

The strategic subtext was harder to miss than usual.

Asked whether Tesla and SpaceX might merge, Musk cited the growing overlap around Terafab before observing that one cannot discuss combining companies on an earnings call, having just spent an hour describing two companies that increasingly cannot function without each other.

Analysts have put the odds of a combination at 80% to 90% by early 2027.

Investors have already marked Tesla down 17% this year against a rising Nasdaq, and SpaceX has shed more than 40% from its post-listing peak.

The pitch is that the spending buys a robotics and autonomy platform worth far more than a carmaker.

The problem is that shareholders are being asked to fund it out of a business whose margins are going the wrong way.