Tesla has unveiled a significant strategic pivot towards artificial intelligence and robotics, announcing a substantial $2 billion investment in Elon Musk's xAI venture while confirming production of its Cybercab robotaxi remains on track for this year. This move comes as the electric vehicle manufacturer faces its first annual revenue decline, with 2025 figures showing a 3% drop to approximately $94.83 billion.
End of an Era for Flagship Models
In a decisive shift, Tesla will cease production of its Model S sedans and Model X SUVs – the vehicles that originally established the company as a pioneer in the electric vehicle market. These flagship models, which once represented Tesla's technological leadership, have dwindled to account for only a small fraction of current revenue. The factory space previously dedicated to these vehicles will be repurposed for robotics manufacturing.
Capital Investment Surge
The company's ambitious expansion plans, which encompass humanoid robots, Semi trucks, Roadster sports cars, and the Cybercab robotaxi, will require substantial factory investments. Chief Financial Officer Vaibhav Taneja revealed that capital expenditures are projected to exceed more than double the $8.5 billion allocated for 2025. Following this disclosure, Tesla's shares initially climbed around 3.5% in after-hours trading before settling at a 1.8% increase.
Transition Phase Challenges
Thomas Monteiro, a senior analyst at Investing.com, observed that Tesla is "entering a transition phase" where investors are being asked to support potential revenue from self-driving software and robotaxi ventures before witnessing a recovery in traditional automotive sales. "That makes rollout metrics – not deliveries – the most important leading indicator from here," Monteiro emphasised.
Musk has made several optimistic forecasts about robotaxi deployment, previously predicting fully autonomous vehicles would reach half the United States population by the end of 2025, before narrowing this goal to deployment in the top eight to ten metropolitan areas. The company has since missed these targets, currently operating a limited robotaxi service only in Austin, Texas.
Core Business Under Pressure
Tesla's primary electric vehicle business, which still generates most of the company's revenue, faces increasing pressure as competitors introduce newer models, often at lower price points. The conclusion of U.S. tax incentives for electric vehicles has further complicated the landscape, while Musk's political commentary has reportedly alienated some potential customers.
To maintain sales volumes, Tesla has heavily relied on discounts and incentives while introducing lower-priced versions of its best-selling models. Wall Street anticipates the company will deliver 1.77 million vehicles in 2026, representing an 8.2% increase according to Visible Alpha data.
Financial Performance Mixed
Despite the revenue decline, Tesla reported adjusted earnings per share of 50 cents in the fourth quarter, surpassing Wall Street expectations of 45 cents according to LSEG data. However, net income fell 61% to $840 million during the same period.
The company's automotive gross margin, excluding regulatory credits, improved to 17.9%, up from 13.6% a year earlier and significantly exceeding expectations of approximately 14.3% according to Visible Alpha.
Energy Business Shines
Tesla's energy generation and storage division has emerged as a notable success story, benefiting from sustained demand for grid-scale batteries that support renewable power and stabilise electricity networks. Revenue from this segment rose 25.5% to a record $3.84 billion in the December quarter, substantially surpassing analysts' estimates of $3.46 billion.
AI Focus Intensifies
Investors have increasingly concentrated on Musk's push into self-driving technology and robotics, seeking evidence that autonomy initiatives are progressing from promise to tangible product. The investment in xAI was widely anticipated, with analysts suggesting Tesla will benefit from xAI's advanced models and growing valuation.
"With Tesla's legacy EV business slowing, Tesla investors can take part in the scorching hot AI boom," commented Andrew Rocco, a stock strategist at Zacks Investment Research.
Supply Chain Concerns
Musk has warned about potential memory chip shortages that could hinder Tesla's plans in coming years, suggesting the company should consider building its own chip-making facility for protection. "If we don't do that, we're just going to be fundamentally limited by supply chain," he cautioned. "In a worst-case geopolitical situation it would be quite a severe situation."
The rapid expansion of artificial intelligence infrastructure by U.S. technology firms has absorbed much of the global memory-chip supply, driving up prices as manufacturers prioritise components for higher-margin data centres over consumer devices.
Regulatory and Production Hurdles
Investors continue to monitor progress on Tesla's Full Self-Driving and robotaxi deployments, including regulatory advancements and clearer timelines for the purpose-built Cybercab, designed without a steering wheel or pedals. Cybercabs will join the existing robotaxi service, which currently utilises Model Y vehicles running a version of Full Self-Driving, and will also be available for consumer purchase.
Musk recently described initial production of the Cybercab robotaxi and humanoid robot Optimus as "agonisingly slow" before accelerating over time. On Wednesday, he indicated Tesla does not anticipate significant Optimus production volume until late 2026.
Regulatory challenges persist for the Cybercab, which Musk has confirmed will lack steering wheel or pedals – contravening current federal design standards. While Musk continues to predict rapid progress for Full Self-Driving, a vision he has promoted for nearly a decade, he has not provided definitive dates for regulatory approval or widespread unsupervised deployment.
Despite these challenges, Tesla's shares rose approximately 11% during 2025. An $878 billion compensation package for Musk, linked to ambitious operational and valuation milestones, has reassured investors of his ongoing commitment to Tesla amidst his diverse business and political interests.
