Tesla reported record third-quarter revenue that beat Wall Street estimates on Wednesday, driven by the highest quarterly sales of its electric vehicles as US buyers rushed to lock in a key tax credit ahead of its expiry last month.

However, Tesla's profit failed to live up to analysts' expectations, in part due to tariff and research costs, as well as a drop in income from regulatory credits that are expected to continue to fade away with recent legislation passed by the Trump administration.

Tesla's $1.45 trillion valuation largely reflects investor bets on CEO Elon Musk's pivot to robotics and AI, but vehicle sales remain key to the financial stability of the company while those products are being developed. Shares of the Austin, Texas-based company were down 4% in extended trading.

Demand for Tesla's vehicles and those of its rivals is also expected to drop through the rest of the year without the tax credits that have been a key driver of EV sales.

Apart from the removal of tax credits and the waning sales of regulatory credits that traditional automakers bought to make up for their polluting vehicles, Tesla is also grappling with tariffs imposed by the Trump administration on auto-parts imports, which Chief Financial Officer Vaibhav Taneja said cost Tesla more than $400 million in the quarter.

The EV maker also reported a 50% rise in operating expenses driven by AI and other research and development projects, an increase in stock-based compensation, and on an earnings conference call, Taneja said capital expenditures would rise substantially in 2026.

"Tesla dished out just the right amount of good and bad news to both appease its fans while also providing enough evidence for its critics," Camelthorn Investments adviser Shawn Campbell told Reuters. "This earnings report isn't going to change anyone's mind on Tesla."

To combat a demand drop, Tesla introduced lower-cost "Standard" variants of Model Y and Model 3 vehicles earlier this month, stripping out a myriad of premium and basic features and lowering prices by about $5,000 to $5,500.

While Tesla hopes the cheaper variants will drive higher volumes, analysts warn the move will squeeze margins as thousands of dollars of cost cuts per vehicle may not fully compensate for lower selling prices.

Tesla said it was on track to start volume production of its Cybercab robotaxi, Semi truck and Megapack 3 battery in 2026. Tesla's energy business also showed strength, including an 81% increase in storage deployment in the quarter, and its robot plans are advancing, with production of humanoid bot Optimus hopefully starting toward the end of 2026, Musk said.

The electric vehicle maker reported total revenue of $28.1 billion for the third quarter ended September 30, compared with analysts' average estimate of $26.37 billion, according to data compiled by LSEG.

Profit per share in the third quarter was 50 cents, below analysts' estimates of 55 cents.

Automotive regulatory credits, once a key driver of profit, fell to $417 million in the quarter from $739 million a year ago and $435 million in the second quarter.

Tesla reported gross margin of 18%, compared with estimates of 17.5%. Its closely watched automotive gross margin, excluding regulatory credits, was 15.4%, compared with an average estimate of 15.6%, according to 19 analysts polled by Visible Alpha.

Tesla did not provide a full-year forecast for production, but Musk said Tesla could expand production, given his confidence in self-driving software. Asked whether increasing production would require offering incentives and squeezing profit margins, Musk forecast "nutty" demand for the self-driving Cybercab and said margins would not be sacrificed.

Tesla launched a limited rollout of its self-driving "robotaxi" service in Austin, Texas earlier this year. Musk also said he expected robotaxis to operate without safety drivers in large parts of Austin this year and that robotaxis would be operating in eight to ten metropolitan areas by the end of the year as well. In July, he had predicted Tesla robotaxis to serve about half the U.S. population by year end.

Wall Street expects Tesla's deliveries in 2025 to fall 8.5% due to the expiry of the tax credit, reliance on older models and rising competition. CEO Musk's embrace of right-wing politics has also alienated some potential buyers.

But many investors are deeply confident in Musk. Nancy Tengler, CEO and chief investment officer of Tesla shareholder Laffer Tengler Investments, said she was bullish on the next three to five years. "I'm less concerned about the next quarter," she said. "It's messy, it's hard, it's trial-and-error, it's try again. But this is a CEO who is determined. And I think what we've seen historically is that he will get it done"