EV slump cuts Tesla operating profit 57%, clouds AI pivot

2026-07-23

Earnings slump

Tesla, the U.S. electric vehicle maker, said on the 22nd that operating profit for the April-June 2026 quarter fell 57% from a year earlier to $398 million, or about 65 billion yen. Free cash flow was negative $1.092 billion, pushing the company into a quarterly loss for the first time in about two years. Tesla shares fell 4% in after-hours trading on the U.S. stock market on the 22nd.

Core EV business stumbles

Revenue growth in the EV business, which accounts for 70% of sales, came in at just 23%, while total operating expenses rose 47%. Gross profit margin in the EV business was 16%, below the market forecast of 18%. According to U.S. research firm Cox Automotive, Tesla's U.S. EV sales fell 13% in the April-June quarter.

Sales conditions worsened after the Trump administration said it would end tax credits for EV purchases from fall 2025 and review emissions regulations. Tesla also needs to increase sales incentives that help fund discounts. The repeal of emissions rules cut revenue from sales of CO2 credits to other companies by 67%. Garrett Nelson of CFRA Research said on the 22nd that regulatory changes had a significant adverse impact and highlighted uncertainty.

Premium models and robotaxis

In May, as part of its shift toward AI, Tesla ended production of two premium EV models priced above $110,000 that had been highly profitable. In its main U.S. market, the company faces not only higher tariffs and logistics costs but also higher procurement costs for semiconductors constrained by AI demand, making it even clearer that Tesla is relying on mass-market Model Y and Model 3 vehicles for profit.

For its autonomous taxi service, or robotaxi, which Tesla sees as a pillar of growth, the company had planned to operate in up to 10 major U.S. metro areas by the end of 2025, but it gave no target for expansion on the 22nd. Chief Executive Elon Musk said on the earnings call only that Tesla had ambitious goals for public-road operation but also needed to be cautious about safety. An executive said some states are difficult to clear from a regulatory standpoint.

Ties to SpaceX

The backdrop to Tesla's push into AI is intensifying competition in EVs from Chinese rivals such as BYD, forcing the company to rethink its sources of revenue. Still, EVs account for 70% of sales. In AI and robotics, where Tesla plans to increase investment, Chinese companies are also closing in with low-priced products.

Musk has a vision of integrating the companies he leads around AI. Tesla has long been subject to merger speculation with SpaceX, the space company where Musk is chief executive. With SpaceX going public in June and both companies now listed, some view a merger as easier to pursue.

SpaceX positions AI as a growth area and is developing the foundation model 'Grok'. It also has a plan to deploy data centers in space as massive computing infrastructure for AI. The two companies are expanding cooperation and have also announced plans to establish and jointly operate a semiconductor mass-production plant, 'Terrafab', in the United States. They will also move ahead with installing Grok and satellite communications functions in Tesla vehicles.

Musk on the 22nd only said he could not comment on a merger. Still, AI as the growth story is a common thread for Tesla and SpaceX. If Tesla's EV business remains under pressure, the timing of any merger could move forward.

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