Tesla Inc (TSLA) USD0.001

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Tesla reported a 3% drop in revenue to $24.9bn ($24.5bn expected). Within that, the core auto business saw an 11% drop, offset by strong growth in Energy Storage (+25%) and Services (+18%).

Operating profit fell 11% to $1.4bn ($1.1bn expected), driven by a 39% increase in costs as the business invests for growth.

Over the quarter, Tesla produced 434,358 vehicles, down 5% and delivered 418,227, down 16%.

Free cash flow fell 30% to $1.4bn, and net cash, including leases, was $35.7bn at the end of the quarter.

Tesla expects to double its capital expenditure in 2026 to fund several projects, including the Cybercab, Tesla Semi, and Megapack 3, which remain on track for volume production in 2026. Tesla Model S and X are being discontinued, with factory space shifting to Optimus production.

The shares were up 2.8% in pre-market trading.

Our view

Tesla’s fourth quarter was strong enough, with auto margins improving and cash flow holding up. But the core auto business has been trending down for some time now. The good news is that it's no longer the main driver of the valuation, and the earnings call delivered several important updates.

Investment in Tesla’s next phase has been building for a few quarters, and 2026 is set to be the biggest step yet. Capex is expected to more than double to $20bn, marking a clear shift in strategy. That brings both meaningful opportunities and notable financial implications.

On the positive side, the higher spend shows Tesla believes it is ready to scale its autonomous fleet, whether through Robotaxis or the new dedicated autonomous car, the Cybercab. Safety drivers have already been removed from a small group of vehicles, an important milestone.

Tesla also confirmed that early Cybercab production is due to start in the coming months. Alongside this, Robotaxi operations are planned to expand into seven more cities in the first half of 2026. Scaling up quickly will be essential to maintaining investor sentiment.

This is the step change Tesla needs to regain earnings momentum. Even so, the financial benefits are unlikely to show before late 2026 or, more realistically, 2027. The potential is significant, and Tesla remains one of the few companies capable of delivering autonomous technology at scale.

The downside of ramping investment is that Tesla will almost certainly enter a period of negative free cash flow, at least over 2026, perhaps longer. This isn’t a near-term concern given Tesla’s strong balance sheet and large cash reserves, but it does change the financial profile.

Energy storage remains another promising growth area and is already delivering meaningful value. It’s a lumpy business, but the long-term opportunity is big. With global power demand rising as AI adoption grows, Tesla’s products look well-positioned.

Looking further out, Tesla’s humanoid robot, Optimus, could represent a major future market. This won't be a dial mover for several years, but it’s a future growth avenue that needs to be taken seriously.

All in, we continue to see Tesla as one of the strongest candidates to commercialise real-world AI, from autonomy to future robotics. With Elon Musk secured at the helm, the valuation can be supported at high levels if execution goes well.

Even still, at over 200x next year's forecast earnings, it's sitting at one of the highest points in Tesla’s history. Perhaps more than ever, Tesla is a higher‑risk, highly volatile name with little room for missteps.

Environmental, social and governance (ESG) risk

Most of the auto industry falls into the medium-risk category in terms of ESG. Product governance, particularly around safety, and carbon emissions from products and services are key risk drivers. Business ethics, labour relations and direct carbon emissions are also contributors to ESG risk.

According to Sustainalytics, Tesla's management of ESG risks is strong.

Elon Musk’s political and extra-curricular activities are a risk to monitor. Tesla also has a high degree of key person risk, Elon Musk is core to the investment case and the premium valuation, to some extent, relies on his continued leadership. Governance concerns also include Elon Musk's past social media posts which impacted Tesla's share price. Other areas to watch include safety concerns around its autopilot technology and the management of its workforce.

The author and a connected party hold shares in Tesla.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

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