Tesla Motors, the electric vehicle manufacturer led by Elon Musk, saw its second-quarter adjusted profit fall short of expectations, impacted by significant price cuts to boost sales and a sharp decline in revenue from selling regulatory carbon credits to competitors.

The Texas-based company reported on Wednesday that its adjusted net profit for the three months ending in June dropped 17% year-over-year to $1.2 billion, significantly below the Wall Street consensus estimate of $1.9 billion.

Despite a record quarterly delivery of 480,126 vehicles, which drove revenue up 26% to $28.2 billion, surpassing market expectations, profits declined more than anticipated. Tesla's shares fell 4% in after-hours trading following the report.

The results highlight Tesla's current operating reality: after a significant sales slump last year, the company has relied on price reductions to win back customers. Furthermore, Musk's deep involvement in efforts to cut federal spending under the previous administration has also sparked consumer resistance, impacting sales.

Tom Narayan, an analyst at RBC Capital Markets, noted that the continued compression of Tesla's automotive business margins is sufficient proof that the significant delivery growth this quarter was largely achieved through price cuts.

Excluding revenue from carbon credits, the automotive gross margin was only 16.3%, below the analyst average expectation of 18.7% as compiled by data firm Visible Alpha. The company's overall operating margin plummeted to 1.4% from 4.1% in the same period last year.

The sales recovery was most pronounced in Europe, where high fuel prices have also encouraged some consumers to switch to electric vehicles.

The U.S. market, however, remains challenging. The previous administration's reduction of the $7,500 electric vehicle tax credit and the repeal of several incentives supporting EV production have created headwinds. Revenue from Tesla's sale of carbon credits to help other automakers offset compliance costs plunged to $146 million from $439 million a year ago.

With the automotive business still contributing over 70% of Tesla's revenue and facing operational pressure, Musk is accelerating the company's strategic pivot away from solely electric vehicles towards autonomous robotaxis and AI-powered humanoid robots.

To bolster its artificial intelligence and robotics initiatives, Tesla's capital expenditures more than doubled year-over-year this quarter. This massive investment led to the company's first negative quarterly free cash flow in two years, with a cash shortfall of $1.1 billion.

During Wednesday's earnings call, Musk told investors the company still plans to invest over $25 billion in 2026 alone, nearly triple last year's capital expenditure of $8.5 billion.

The world's richest person described this large-scale investment plan as "perhaps the fastest industrial buildout in the United States since World War II."

Musk also cited data showing that major global tech firms plan to invest over $725 billion this year in building AI infrastructure to justify Tesla's strategic shift. Tesla's capital expenditures for the quarter reached $5.79 billion, a surge of 142% year-over-year.

Net profit calculated under U.S. Generally Accepted Accounting Principles (GAAP) was $1.1 billion, down 5% year-over-year. This figure includes stock-based compensation expenses and the fluctuating valuation of Tesla's cryptocurrency holdings and investments related to SpaceX.

Chief Financial Officer Vaibhav Taneja stated that the company's capital expenditures will continue to grow over the next two to three years. He added that, beyond its own cash reserves, Tesla has access to a $30 billion total credit facility, which it can draw upon at any time to accelerate investments in these areas.

Tesla is simultaneously advancing several capital-intensive projects: the Terafab semiconductor research and development factory, a joint venture with SpaceX; the procurement of high-end chips for the Cortex 2 supercomputer cluster; and the development of supporting grid infrastructure.

In February, Tesla began production of its fully autonomous robotaxi, the Cybercab. The company has also launched small-scale robotaxi pilot services in Texas and Florida. Musk acknowledged that the robotaxi business is not expected to generate meaningful revenue until next year at the earliest.