Updated Version 5 - Tesla Cuts Costs Ahead of Potential SpaceX Deal, Musk Remains Heavily Invested in AI and Robots

Rewrite the opening sentence to reflect the reduction in capital expenditure forecast; add comments from Elon Musk, and supplement financial and corporate details throughout the text.

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Reuters, October 21 - Tesla TSLA.O on Wednesday lowered its annual capital expenditure forecast by a fifth and unexpectedly reported positive free cash flow for the third quarter, after the company's investments in artificial intelligence and robotics significantly lagged Wall Street expectations.

This surprise positive cash flow came at a critical time for Tesla, as CEO Elon Musk is considering merging the electric vehicle manufacturer (link) with his much more capital-intensive space venture, SpaceX SPCX.O.

While reduced spending strengthens Tesla’s financial position ahead of any potential deal, conserving cash at the expense of investments in AI, robotaxis, and humanoid robotics may unsettle investors who are betting on a growth story.

Tesla shares rose as much as 2% in after-hours trading after the company reported positive cash flow, higher gross margins, and revenue that beat market expectations, but later reversed course to close 2% lower. The stock is down about 14% so far this year.

“The positive free cash flow surprise is certainly notable, but combined with lower-than-expected capital expenditures, it leaves open questions about the automaker’s next move,” said Ryan Lee, Senior Vice President of Product and Strategy at Direxion, which offers Tesla-linked ETFs. “Reduced capital spending suggests that Tesla’s ‘all-in’ approach in the AI arms race is less bold than what many expected from Elon Musk.”

Tesla stated that it now expects capital expenditures in 2026 to be about $20 billion, down from the previous forecast of over $25 billion, but did not specify which areas would see the cuts.

According to LSEG data, Tesla’s capital expenditures in the third quarter ending September 30 were $4.7 billion, double the level from a year earlier but below the analyst average expectation of $7.5 billion. Tesla reported free cash flow of $1.53 billion, versus a previously expected cash outflow of $4.92 billion.

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Talks Underway on SpaceX Merger

Musk said on Tuesday that a merger between Tesla and SpaceX “is a good idea,” adding that both companies have set up a special committee to discuss the deal. On Wednesday, Musk said on an analyst call he had no further comment on the matter.

Such a merger would create a company central to Musk’s long-term vision (link): a technology and manufacturing empire spanning artificial intelligence, energy, robotics, communications, and transport both on Earth and in space.

Nevertheless, investors will seek evidence that Tesla is committing sufficient resources to turn Musk’s ambitious ideas into commercial reality—especially since the launch of its autonomous robotaxi service has fallen behind earlier promises. Tesla’s energy division has recently provided balance for its main auto business, even as automaker faces close scrutiny amid fierce international competition from rivals rolling out updated, often cheaper models. Tesla remains heavily reliant on its aging Model 3 and Model Y lineup.

“The merger faces a high bar, but tonight’s earnings data make its financial logic harder to dismiss,” said Thomas Monteiro, Senior Analyst at Investing.com.

“The takeaway is that Tesla’s surprise positive free cash flow this quarter doesn't come from profit growth, but rather because its spending was cut by billions as SpaceX prepares to invest up to $40 billion in a single quarter."

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Revenue Flat but Beats Expectations

Despite the expiration of U.S. tax credits that supported sales last year, revenue was flat compared to the same period a year ago, coming in above Wall Street’s target. Net profit plunged 43%.

Tesla said in a statement that its passenger vehicle order backlog at the end of the quarter was at a four-year high. Elevated gasoline prices spurred demand for EVs, especially in Europe.

Q3 deliveries reached 486,532 vehicles, putting Tesla on course for its first annual delivery growth in three years.

“Demand for our models is growing rapidly, far ahead of our capacity,” Musk said on the analyst call. “Simply put, after years of tough, flat progress, I believe we’re now entering a fun and significant growth phase.”

Tesla said its Full Self-Driving (FSD) (supervised) option was included in more than three-quarters of new vehicle deliveries in North America, up nearly 20 percentage points from the second quarter.

According to Visible Alpha, Q3 automotive gross margin excluding regulatory credits was 18.1%, higher than analyst expectations of 16.7%.

Tesla said its goal is to produce 5 million vehicles a year around 2030, up from the 2.5 million expected this year.

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