Tesla heads into its third-quarter report with a demand story that improved sharply and a profit story that went the other way. Last quarter brought record second-quarter deliveries, the largest order backlog since 2023 and a Robotaxi network that grew from three cities to seven. It also brought lower margins across the board and negative free cash flow as spending more than doubled. The October 21 report, due after the close, should show which of those two narratives carries more weight heading into a multi-year investment cycle.
The Street expects non-GAAP earnings of $0.44 a share on revenue of $27.80 billion. That would be roughly triple the $0.14 Tesla earned last quarter and about 19% above the $0.37 from a year ago. Revenue, however, is projected to slip about 1.1% from last year and land slightly below the prior quarter's $28.24 billion. In other words, analysts are betting on a margin recovery rather than top-line growth. The Earnings Whisper of $0.40 sits modestly below consensus, which suggests the more informed bar is a bit lower than the published number. With no fresh formal guidance to anchor the forecasts, the conference call commentary is the best guide to what matters.
The central question is whether last quarter's margin damage was mostly one-time. Management argued that automotive gross margin excluding credits, which fell from 19.2% to 16.3%, was roughly flat once a prior-quarter warranty and tariff benefit of about $230 million was stripped out. Energy gross margin dropped from 39.5% to 20.4%, hurt by a $240 million legacy warranty true-up and the loss of a tariff benefit. If those explanations hold, both segments should rebound this quarter without those charges. Two things would weaken that case. The first is auto margins stuck near last quarter's level, which would point to rising interest rate subsidies on loans as a lasting cost. The second is energy margins settling below the mid-to-low 20s range management now calls normal, which would suggest pricing competition is doing more damage than the company acknowledged.
Demand needs to convert into revenue, and here the soft revenue consensus is telling. A record backlog should support deliveries, but management warned that production is now limited by both batteries and electronic components. A quarter where orders stay strong but output stalls would shift the debate from demand to supply. On the growth side, FSD paid customers rose from about 1.1 million to roughly 1.5 million over two quarters. Further gains there, along with services margin holding near its record 14.1%, would support the case for higher-margin recurring revenue. Energy deployments rebounded to 13.5 GWh last quarter, and holding that pace matters after the Q1 dip.
The heavier question is cash. Capital spending is guided above $25 billion and expected to rise for two to three years, with up to $30 billion in debt facilities helping fund it. Updates on Robotaxi expansion, Optimus, the MegaPod compute boxes and the Austin chip effort will need to show enough progress to justify that spending. How deep free cash flow runs negative will be scrutinized closely.
Expectations have warmed. Sentiment has risen to 44.2% bullish from 26.7% ahead of the last report, and the shares are up 10.9% since then, roughly double the S&P 500's gain. Even so, at $378 the stock trails its 200-day moving average of about $391 and sits well below last quarter's range. It is now within about 3% of its post-earnings high near $389, so a convincing report could push it through that level. In the end, the narrative holds if Tesla shows that last quarter's margin hit was temporary while backlog turns into deliveries. If margins fail to recover as spending accelerates, the optimism built since the last report will be harder to defend.