How Accounting Helped Tesla Beat Gross Profit Numbers

Coming into Friday trading, Tesla stock was down 17% this year. (Justin Sullivan/Getty Images)

Key Points

Tesla reported third-quarter automotive gross profit margin, excluding regulatory credits, of about 18%, beating Wall Street projections.
Tesla’s gross margins were boosted by $786 million in tariff refunds following a U.S. Supreme Court ruling in February 2026.
Adjusted for the tariff refunds, Tesla’s automotive gross profit margin was about 17%, which was in line with Wall Street estimates.

Tesla reported fine third-quarter numbers on Wednesday, which was a relief, given what happened after the company’s second-quarter report. Importantly, automotive gross profit margin beat Wall Street estimates, but that was helped by a one-time item.

The electric-vehicle and AI company reported adjusted earnings per share of 48 cents, a few pennies better than Wall Street expected. Automotive gross profit margin, excluding the impact of regulatory credits, was about 18%, about one percentage point better than Wall Street projected. Total gross profit margin was almost 20%, about two percentage points better than analyst projections.

Tesla stock dropped 3.1% on Thursday following the report, but it was a lousy day for the market. Meta Platforms stock dropped 7% after its earnings report raised concerns about AI financing. The Tesla drop was also far better than the 14.5% plunge following weaker-than-expected second-quarter numbers.

Gross margins, however, were boosted by tariff refunds. “In February 2026, the U.S. Supreme Court issued a ruling invalidating certain tariffs previously imposed under the International Emergency Economic Powers Act (IEEPA),” Tesla disclosed in its quarterly 10-Q report filed on Thursday. “During the three months ended September 30, 2026, we recognized IEEPA tariff refunds of $526 million and $260 million as reductions to energy generation and storage cost of revenues and automotive sales cost of revenues, respectively.”

Adjusting costs and revenues for all the impacts, Tesla’s automotive gross profit margin was about 17%, in line with Wall Street. Total gross profit margin was about 18%, also in line with analysts’ prediction.

Tesla’s “gross margin beat mystery [is] solved,” wrote GLJ analyst Gordon Johnson on Thursday. He noted in a preview report that investors care about gross profit margins. When Tesla misses consensus estimates, the stock drops.

“Since 2023, Tesla has missed the consensus on gross margin six times,” wrote Johnson in a preview report. “The stock fell the next day all six times, by an average of 11.3%, most recently [down] 14.5% after 2Q26.”

Tesla posted in-line third-quarter numbers, after adjustments, but the refunds boosted total earnings. “Barring tariff refunds, Tesla would have missed across the board.”

The tariff refunds make Tesla’s quarter look a little worse than at first glance. Still, investors haven’t been too concerned with current fundamentals lately. They are waiting for Tesla’s AI bets on robo-taxis and robots to pay off. (They are also waiting for a Tesla- SpaceX merger, which Elon Musk endorsed on Wednesday.)

Tesla stock was up 0.1% in premarket trading Friday at $374.80, while S&P 500 and Dow Jones Industrial Average futures were down 0.3% and 0.8%, respectively.

Write to Al Root at allen.root@barrons.com.

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