Tesla reported a steep decline in annual profit Wednesday as it cut car prices to try to fend off growing competition from established automakers like Volkswagen and newer rivals from China.
Chinese carmaker BYD has surpassed Tesla as the largest manufacturer of electric vehicles globally. In Europe, Volkswagen now sells more electric vehicles than Tesla.
Falling car sales have taken a toll on Tesla’s net profit, which was $3.8 billion for the year, down from $7.1 billion in 2024. Profit in the fourth quarter fell to $840 million from $2.1 billion a year earlier.
Revenue slipped 3% to $94.8 billion, as growing sales of large batteries used for energy storage helped compensate for a steep decline in revenue from the car business.
The annual decline in profit was the second consecutive drop. But investors may not be very bothered by it because they do not judge Tesla’s value the same way they do other car companies. Tesla shares rose in after-hours trading.
The company’s shares are trading near a record high because shareholders believe that CEO Elon Musk will deliver on his promises to dominate the market for self-driving taxis and for robots capable of doing complex tasks better than humans.
Repeating themes he has used before, Musk said on a conference call with investors and analysts Wednesday that these technologies would exploit artificial intelligence to usher in an era of “sustainable abundance” where robots do all the work and “everyone can have whatever they want.”
That utopian vision has helped convince investors that they should not be worried about slumping profit and sales, which would be red flags at most companies.
Tesla also said Wednesday that it had agreed to invest about $2 billion in xAI, Musk’s privately held artificial intelligence company. The companies plan to collaborate on AI products and services. Tesla already offers xAI’s Grok chatbot in its cars.
The transaction raises potential conflict of interest issues because of Musk’s large stakes in both companies. But analysts generally applauded the deal. “Tesla investors can take part in the scorching hot AI boom,” Andrew Rocco, a stock strategist at Zacks Investment Research, said in a note Wednesday.
Musk said that investors had urged him to invest in xAI. “We’re just doing what shareholders asked us to do, pretty much,” he said.
In a surprise, Musk said that Tesla will stop producing its S and X models in the coming months and convert the factory space in Fremont, California, to produce humanoid robots by the end of the year.
The Model S sedan, which went on sale in 2012, was the first car that Tesla produced in significant numbers. It established the company as a serious automaker.
In Austin, Texas, the company has begun offering paid rides in a small number of autonomous taxis that do not have human safety monitors aboard.
The company said Wednesday that it would start producing the Cybercab, a two-door vehicle designed to operate fully autonomously, in the first half of the year.
Musk has a long history of making overly optimistic predictions about when products will be ready. And Tesla is far behind Waymo in the nascent self-driving taxi business. Waymo, a division of Alphabet, Google’s parent company, offers driverless service in Austin and five other U.S. cities.
On the stock market, Tesla has a market capitalization of $1.36 trillion based largely on the premise that Tesla could quickly release millions of self-driving taxis if it can perfect the autonomous driving technology.
In theory, a software update could make Teslas already on the road into robot taxis, or Robotaxis, as Tesla calls them.
Waymo has “more commercial miles than Tesla,” said Tasha Keeney, director of investment analysis at Ark Invest, an investment firm that is optimistic about the company’s prospects. “But Tesla has a scale that Waymo does not have.”
Still, investors could become impatient if Musk does not begin to deliver, analysts said.
“For the stock to further outperform, Tesla will need to show clear progress on its efforts in Robotaxi, FSD, and Optimus,” analysts at Barclays said in a note this week, referring to Tesla’s Full Self-Driving software and Optimus humanoid robots.
Investors have also looked past Musk’s outspoken support for right-wing politicians and causes, which has offended many car buyers and contributed to the company's lackluster sales. Tesla said this month that it delivered 1.64 million cars worldwide during 2025, down from nearly 1.8 million in 2024.
Tesla faces some challenges. Republicans in Congress and President Donald Trump eliminated tax credits of up to $7,500 for electric vehicles bought after Sept. 30, pushing sales down in the last three months of last year.
Competition is also intensifying. This year, several automakers will begin selling electric vehicles that charge more quickly and can travel farther on a full battery than Tesla’s most popular models.
Tesla was once one of the most profitable automakers. But Barclays analysts estimated that Tesla’s pretax profit margin in 2025 was about 6%, less than half as much as Toyota Motor.
This article originally appeared in The New York Times.
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