Tesla’s Next Profit Engine Is Still Waiting for Autonomy

Tesla has lost the electric-vehicle crown. The company now wants autonomy to replace the growth story that car sales no longer support, with subscriptions supplying the margins its vehicle business cannot match.

Elon Musk’s “flying” Roadster jumped and flipped through the air this month in a stunt that went viral around the world. Five days after the spectacle, made possible by compressed-gas thrusters developed by Musk’s SpaceX, Musk revealed that the companies were exploring a merger that could accelerate Tesla’s push into autonomous driving.

At stake is more than a technology race. Car groups are trying to move beyond a business model centered on vehicle sales toward recurring revenue from software and AI-powered services — because selling another car once is less attractive than billing its owner every month.

“Automakers are starting to look in the mirror and the software piece is what they are all looking at as the golden goose, because the margins are so high,” said Dan Ives, a tech analyst and partner at merchant bank Yorkville Ives.

FSD carries the autonomy bet

Tesla’s car business remains a crucial cash cow, generating 75 percent of total revenues. That cash will also fund the heavy AI spending Tesla needs to compete with Big Tech rivals, even as the company’s financial results show how expensive the transition has become.

Musk faces a different competitive environment from 2008, when Tesla launched its first battery-powered Roadster. Chinese rivals now lead the electric-vehicle race while investing in software and AI to challenge Tesla in autonomous driving, and BYD took the position of the world’s largest electric-vehicle manufacturer last year.

Musk’s earlier goal of selling 20 million vehicles a year by 2030 has been watered down to 5 million. He delivered 1.6 million last year, and analysts say the near-term key to reaching 5 million sales is Tesla’s “Full Self-Driving” software.

Despite its name, “Full Self-Driving” still requires a human in the driver’s seat paying full attention. Musk claimed at Wednesday’s earnings briefing, where Tesla revealed its largest car order backlog in four years, “The biggest driver for demand is Full Self-Driving. And today, there’s really no competitor for FSD in any car that you can buy.”

More than 75 percent of new Teslas sold in North America include the company’s supervised version of FSD. Tesla has 1.7 million active FSD subscriptions globally, up 67 percent from a year ago, although the company has not disclosed how much recurring revenue those subscriptions generate.

FSD costs $99 a month in the United States, with pricing differing by market. Ives said the technology is already Tesla’s highest-margin business segment and could “transform the whole financial model” if adoption rose from roughly 10-15 percent of its global customer base to about 50 percent.

He argued that expanding FSD could contribute more than selling another 50,000-100,000 cars a year. “For every dollar of FSD revenue, the market rewards it 50-70 percent more than that dollar they would generate from selling an actual car,” Ives said.

Autonomy needs money, approvals, and hardware

That opportunity depends on regulatory approval in multiple markets. Tesla has yet to win approval for its fully autonomous version of FSD, while its supervised version has approval in the Netherlands and several other European countries.

Tesla is seeking wider European Union backing to roll out the supervised system across the bloc through a vote of member states delayed until December. Volkswagen-backed Xpeng is competing for European approval, working with German authorities and targeting EU approval for its FSD rival XNGP after the bloc adopts advanced driver-assistance and autonomous-driving rules expected early next year.

“We aim to be one of the first,” said Xpeng general counsel Zheng Yeqing. Tesla’s autonomy lead is therefore not a settled fact; it is a race involving regulators, Chinese rivals, and companies with ambitions that do not pause for Tesla’s product calendar.

A SpaceX merger could give Tesla more firepower against Chinese rivals and Big Tech groups with far larger AI budgets. Combining the businesses could accelerate research into materials, AI, and manufacturing while cutting costs and improving access to critical parts such as chips.

“You’re going to see the results of what happens when you have a collaboration with the world’s best car company and the world’s best rocket company,” Musk said at the flying Roadster event. It is a grand promise, which is Musk’s preferred size, but the balance sheet has already started charging admission.

Tesla brought in $28 billion in revenue during the third quarter of 2026. Automotive revenue reached $20.6 billion, down 3 percent year over year, while solar panels and storage batteries fell 16 percent to $2.9 billion.

Services and other revenue, including parts and Supercharger use, grew by a third to $4.6 billion. Operating expenses rose 39 percent to $4.8 billion, pushing Tesla’s operating margin down to 2.6 percent from 5.8 percent in the third quarter of 2025.

Net profit fell 43 percent year over year to $787 million. Capital expenditures rose 110 percent to $4.7 billion, while free cash flow dropped 62 percent to $1.5 billion.

Regulatory credits, once a useful lift for Tesla’s results, fell to $113 million from $417 million in the third quarter of 2025. Tesla’s letter to investors blamed flat revenue on lower average selling prices, fewer cars sold, reduced credits, and the decline in its energy-storage business.

The shrinking credits and battery and solar sales, combined with higher operating expenses, reduced profitability. Tesla is spending on AI hardware, and Musk’s extravagant compensation package adds another demand on the business.

The strategy is clear: use the car company to finance AI and software, then turn autonomy into the next profit engine. Tesla wants the recurring economics of a technology company, but it still has to sell cars, win approvals, build the hardware, and make the numbers work first.

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