Tesla (TSLA +4.34%) returned to revenue growth when it reported its third-quarter results, but the company missed earnings estimates and warned of near-term uncertainty.
While most other stocks would have likely fallen precipitously with similar results and commentary, Tesla shares edged higher as investors still believe in CEO Elon Musk's long-term vision. The stock is up about 10% on the year as of this writing.
Let's take a close look at electric vehicle (EV) maker's Q3 results and prospects to see if now is a good time to buy the stock or if investors should stay away.
NASDAQ: TSLA
Key Data Points
An increase in auto sales
After two straight quarters of big declines in its core auto business, Tesla's auto revenue grew in Q3. This was likely because of U.S. customers rushing to buy EVs before the $7,500 federal EV tax credit expired at the end of September.
After a 13% drop in deliveries in both the first and second quarters, Tesla's deliveries rose by 7% in Q3. Model 3 and Model Y deliveries increased by 9%, while other models plunged by 30%.
Tesla's auto revenue rose by 6% to $21.2 billion in the quarter. However, within its auto revenue, its regulatory credits, which are pure gross margin, dropped by 44% to $417 million. This led to its profitability metrics falling despite the increase in auto sales.
Overall, Tesla's revenue climbed 12% to $28.1 billion. Its energy generation and storage revenue soared 44% to $3.4 billion, while its service revenue jumped 25% to nearly $3.5 billion. Adjusted earnings per share (EPS) plunged 31% to $0.50, missing the analyst consensus of $0.54, as compiled by LSEG. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, fell by 9% to $4.2 billion.
Tesla did, however, see a nice increase in free cash flow, as it reduced its capital expenditures (capex) in the quarter. Its operating cash flow was flattish at $6.2 billion, while its free cash flow climbed by 46% to $4 billion.
Near-term uncertainty, but big promise for the future
While Tesla noted it will be facing near-term uncertainty, it once again made big promises for the future. Musk was upbeat about the company soon achieving unsupervised self-driving (FSD) capabilities. He said that with just a software update, he could turn millions of cars into full self-driving cars. However, it is notable that the company subtly changed the language in its shareholder letter, saying that "Every Tesla vehicle delivered today is designed for autonomy." It has also recently changed the definition of FSD.
Given his confidence, Musk said that he would ramp up vehicle production, and that Tesla could be able to produce 3 million vehicles a year within the next two years. This will be to support its Cybercab ambitions, as well as the increase in demand it expects it would see from offering unsupervised FSD technology with its cars, which would allow people to do things like text and watch videos instead of having to focus on the road.
Musk was also upbeat about its Optimus robot, saying Tesla plans to unveil Optimus V3 early next year and begin production toward the end of 2026. He stated that the company is planning to produce a million Optimus robots annually in the future, even though manufacturing presents some difficulties.
Image source: Getty Images.
Should investors buy or avoid the stock?
Tesla's stock trades at a forward price-to-earnings ratio (P/E) of over 188 based on 2026 analyst estimates, while its profitable auto peers -- like Ford Motor Company, General Motors, and Stellantis -- typically trade at multiples of 10 or less. Even luxury automaker Ferrari trades at just 33 times 2026 EPS estimates.
At this point, most of Tesla's stock value comes down to whether Musk can deliver on FSD and his Optimus robots. Without FSD, its core auto business is likely to struggle in the near term with the end of federal tax credits and high tariffs, along with rising competition in the EV space. Notably, Musk has expressed his confidence in FSD for the past six years with little progress, and its supervised robotaxi pilot in Austin has run into issues, so you can decide for yourself whether to share his enthusiasm.
For me, Tesla is a stock to avoid at the moment.
