Tesla's profit tanked. The stock told a different story

Tesla $TSLA didn’t post the kind of quarter that usually lifts a stock. Profit fell sharply, deliveries declined, and margins stayed under pressure. But after-hours trading told a different story — up 4% initially — one that has less to do with cars and more to do with the future investors still want to believe in.

By the numbers, the quarter was bruising. Net income dropped 61% from a year earlier, automotive revenue slid 11%, and total deliveries fell by double digits. Costs rose, operating leverage worked in reverse, and the car business looked stuck in a familiar grind of pricing pressure, higher expenses, and softer demand. It was a rough way to close out a year that was Tesla’s most difficult in a long time; the company posted its first-ever annual revenue decline, showing just how far this Magnificent 7 company has fallen from its most magnificent high-growth era.

But Tesla beat consensus expectations on adjusted earnings (at $0.50 per share), and that was enough to help keep the stock moving. The rest of the lift came from something more durable: Tesla’s ability to keep the market focused on what comes next, rather than what just happened.

The car business, once the unquestioned centerpiece of the Tesla story, now feels like the part investors skim. Automotive revenue fell again, and margins remain thin by the company’s own historical standards. The explanations were familiar — pricing, costs, tariffs, incentives — but the result was harder to ignore: Selling cars has become a tougher, more competitive business, and Tesla no longer looks insulated from that reality.

On the earnings call, CEO Elon Musk said Tesla plans to end Model S and Model X $TWTR production in Q2 2026, freeing up space for production of its Optimus humanoid robot — a move that turns the “physical AI” pitch into an actual factory schedule. Tesla’s Model 3 and Model Y have already swallowed the business, making up about 97% of Tesla’s roughly 1.64 million deliveries last year, which leaves S and X as brand artifacts with shrinking strategic weight.

Energy, by contrast, continues to behave like a business with momentum, with revenue rising 25% to $3.84 billion. Storage deployments hit a record 14.2 gigawatt hours, and the segment posted its fifth straight quarter of record gross profit ($1.1 billion). In a quarter defined by softness elsewhere, energy looked scalable, profitable, and easier to model without heroic assumptions. Energy is becoming the part of Tesla that looks least like a bet.

But energy wasn’t the reason the stock climbed. Autonomy was.

Tesla leaned hard into robotaxis, saying it began testing driverless rides in Austin late last year and started removing safety monitors from some customer rides in January on a limited basis. It also published an ambitious map of cities it hopes to serve in 2026. The details immediately sparked debate about what counts as “unsupervised,” how constrained the rollout remains, and how far Tesla still is from something that looks like a scalable commercial service. That debate didn’t slow the rally, only reinforcing the point that Tesla is still being priced on optionality, not confirmation.

Then, as usual, came the Musk subplot. Tesla disclosed plans to invest about $2 billion in xAI, Musk’s artificial intelligence company, alongside a framework agreement to explore collaboration. That, of course, bundles several unresolved questions into one line item: governance, capital allocation, and how tightly Tesla’s fate is now tied to Musk’s broader AI ambitions. It also pulls Tesla more firmly into the AI trade, a place the market continues to reward generously.

That positioning comes with a cost — a big one. Tesla’s operating expenses climbed sharply, driven in part by its expanding AI and research efforts. The company highlighted its growing AI compute footprint and future chip plans, framing higher spending today as a bridge to higher-margin software and fleet revenue tomorrow. It’s a story investors know well by now. It’s also a story they keep choosing to fund.

Tesla can still find ways to feed the narrative the market still values: autonomy edging closer to operations, energy compounding quietly, and AI positioned as the long-term payoff. The risk, hanging over the entire print — again, as usual — is how long investors are willing to look past a car business under pressure while waiting for those future bets to harden into something concrete.