Over the past year, the broader market continued to overlook weaker earnings, provided companies make a strong case for AI investments. The market used to believe that if companies spend significantly today, they can dominate tomorrow. However, this narrative seems to be changing.
Investors are now being selective, wondering if these investments will eventually translate into stronger earnings, healthier cash flow, and resilient competitive advantages. This change gives the backdrop for Tesla, Inc. (NASDAQ:TSLA)’s latest earnings report.
Tesla Now Forms Part of AI Conversation
Currently, Tesla, Inc. (NASDAQ:TSLA) is not being considered only as an EV manufacturer. Just like leading tech giants, it expects market players to accept the weaker near-term profitability while the company continues its investments in broader AI infrastructure, Robotaxi, Full Self-Driving, and the Optimus humanoid robot. At the forefront, the quarter looks strong, with revenue climbing 26% YoY, vehicle deliveries touching another record, and the company seeing the largest order backlog since the year 2023.
The market emphasized a sharp decline in profitability as automotive gross margin declined to 16.9%. While these numbers alone don’t change Tesla, Inc. (NASDAQ:TSLA)’s long-term growth prospects, put together, they hint that the Musk-led company is investing far more aggressively compared to its current earnings capacity.
Despite Concerns, BofA Remains Optimistic
Despite the concerns about elevated spending, Bank of America believes that investors are looking closely at the earnings specifically and not at the upcoming opportunity. While the firm slashed its 2026 EPS estimates from $2.13 to $1.76, reflecting a reduction of ~17%, it maintained its $460 price target. The reduction in estimates was because of weaker automotive margins, softness in profitability in the broader Energy business, and increased R&D spending.
That tells investors something important.
The firm’s thesis revolves around the assumption that Tesla, Inc. (NASDAQ:TSLA) has only started to monetize its autonomous driving capabilities, with such businesses expected to fetch much higher margins compared to vehicle manufacturing.
Let’s discuss the evidence that supports this view. The company saw record net new FSD subscriptions, resulting in fleet penetration of more than 15%. Robotaxi operations have expanded to 7 markets, with Optimus remaining on track to enter production later this year before it ramps up further in 2027.
While there is still uncertainty about these businesses becoming meaningful profit contributors, BofA opines that they will ultimately matter far more than the current margin compression that the market is paying attention to.
The Bull Case: Tesla Focuses on Higher-Margin Business
The optimistic case doesn’t revolve around the fact that Tesla, Inc. (NASDAQ:TSLA) will sell more cars. But the company is slowly transitioning towards businesses that can help generate recurring, software-like revenue. If this transition sees the light at the end of the tunnel, the increased investment spending can look very different in hindsight.
The investors are now required to pay close attention to numerous metrics over the upcoming quarters. Investors now need to see automotive gross margins stabilize and free cash flow recover despite elevated AI spending. Furthermore, FSD adoption needs to rise continuously, and Robotaxi deployments should expand beyond the early pilot programs and into commercially meaningful operations.
If everything happens as expected, the company’s current investment spree will look a lot like the earlier periods in its history when elevated spending temporarily impacted earnings before bringing in significant operating leverage.
The Bear Case: The Transition Can Be a Time-consuming Process
The bearish argument is a bit straightforward. Tesla, Inc. (NASDAQ:TSLA)’s automotive business continues to become less profitable. Currently, its management continues to invest billions of dollars toward projects whose financial returns can’t be quantified.
If the company experiences continued pricing pressure, margins remain weak, and autonomy takes longer than current expectations to generate significant revenue, investors might start valuing the company more like a traditional automaker and less like a technology company. However, this will not mean that Tesla, Inc. (NASDAQ:TSLA)’s long-term vision is wrong. It means the market might want to pay less premium as they wait for that vision to materialize.
Competitive Landscape
The competitive positioning of Tesla, Inc. (NASDAQ:TSLA) continues to become unique in the broader EV landscape. BYD has been winning investors on the back of manufacturing scale, aggressive pricing, as well as rapid international expansion. Rivian Automotive, Inc. (NASDAQ:RIVN)’s story revolves around improvement in production efficiency and decreasing the cash burn, with Lucid Group, Inc. (NASDAQ:LCID) focusing on proving it has the capacity to scale production without incurring additional pressure on the balance sheet.
On the other hand, Tesla, Inc. (NASDAQ:TSLA) is being valued on a different standard. Market players don’t see this stock as an EV manufacturer, but they are trying to assess whether its investments in FSD, Robotaxi, and Optimus can result in significant profit engines. This is why the investors ignored the company’s 26% revenue growth and emphasized the 16.9% automotive gross margin, which fell short of expectations.
Let’s compare Tesla, Inc. (NASDAQ:TSLA) with Rivian Automotive, Inc. (NASDAQ:RIVN).
The company has been putting money into software, next-gen EV platforms, and autonomy, just like Tesla. While BofA slashed its 2026 EPS estimate to $1.76, Rivian remains unprofitable and expects an adjusted EBITDA loss of between $1.8 billion and $2.0 billion in 2026.
Tesla is being valued on the expectation that Robotaxi, FSD, and Optimus should deliver substantial profit margins, Rivian is being valued mainly on production scale, narrowing losses, and manufacturing efficiency. Simply put, investors consider Tesla as a software-like company whose economics will materialize over time, while Rivian is being considered based on its current position.
What Short Interest and Hedge Funds’ Holdings Reveal?
Short interest is another metric worth watching over the coming quarters. As of now, the short interest suggests that Tesla, Inc. (NASDAQ:TSLA) is viewed very differently from many EV peers. Its short interest stands at just 2% of float, compared with 12.39% for Rivian Automotive, Inc. (NASDAQ:RIVN) and a striking 40.30% for Lucid Group, Inc. (NASDAQ:LCID). The relatively low level of bearish positioning is despite the earnings disappointment and margin concerns.
On the other hand, the higher short interest in the other 2 companies demonstrates greater investor skepticism around their execution, financing requirements, and path to sustainable profitability.
Tesla, Inc. (NASDAQ:TSLA)’s hedge fund holdings declined sequentially in Q1 2026. According to Insider Monkey’s database, 123 hedge funds reported owning the company’s stock in Q1 2026, down from 137 in Q4 2025.
The Bottom Line
Tesla’s latest quarter didn’t end the debate surrounding the stock—it simply changed what investors need to see next. The company demands investors’ support via accepting subdued profitability in exchange for the expectation of much larger software, autonomy, and robotics businesses.
BofA’s decision to keep its $460 price target, despite cutting the 2026 EPS estimate by ~17%, demonstrates confidence that Tesla, Inc. (NASDAQ:TSLA)’s long-term value will be determined by its ability to commercialize such technologies rather than by the automotive margins.
For investors, the focus should now shift away from vehicle deliveries alone. The more important questions are whether automotive margins stabilize, free cash flow improves, FSD adoption continues to accelerate, and Robotaxi begins generating meaningful commercial traction. Those metrics—not headline revenue growth—are likely to determine whether Tesla’s next phase of growth lives up to the market’s expectations.
While we acknowledge the risk and potential of TSLA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than TSLA and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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