Can Musk's AI Gamble Rescue Tesla's Declining Profits?

Tesla's CEO Elon Musk has outlined ambitious investment plans in AI, robotics and energy infrastructure, even as the company reported its second consecutive quarterly decline.

The EV manufacturer's annual revenue fell to US$94.8bn, with profits dropping 61% in the final three months of 2025. Alongside these results, Elon announced a shift in the company's mission from 'Sustainable Abundance' to 'Amazing Abundance'.

During a Q&A call with investors on 28 January, Elon revealed plans for substantial capital expenditure across AI infrastructure and humanoid robotics.

"We're making big investments for an epic future," he says. The company also announced the cessation of Model S and Model X production at its California facility to accommodate manufacturing of humanoid robots.

Elon's separate AI venture, xAI, is set to receive a US$2bn investment.

Tesla's competitive position in the EV market has shifted, with China's BYD recently surpassing the company as the world's largest EV seller.

According to Vaibhav Tanjea, Chief Financial Officer at Tesla, margins are expected to face additional pressure from the transition to a fully subscription-based model for Full Self-Driving (FSD).

Strategic focus on solar infrastructure

Elon outlined plans to expand Tesla's involvement in solar power production to support AI operations. "We think the best way to add significant capability to the grid – lets say it is powering AI data centres – is solar and batteries on earth and solar in space," he says.

The company aims to achieve 100 gigawatts per year of solar cell production, integrating operations across the entire supply chain from raw materials to finished panels.

This initiative forms part of Tesla's strategy to become what Elon described as a "significant manufacturer of solar cells" while making "massive investments in AI". He added that this would lead to increased investment in "batteries as well as the entire supply chain of batteries".

Despite achieving 26.6% year-on-year growth in the energy sector, with Megapack 3 and Megablock products awaiting launch, Vaibhav indicated the company expects "margin compression from the increased low cost competition, impacts to market from policy uncertainty and the cost of tariffs".

Robotics and manufacturing expansion

Tesla plans to unveil Optimus 3, its latest humanoid robot, in 2025. Elon described the product as "an incredibly capable robot" that would be "surprising to people".

He continued: "Optimus really will be a general purpose robot that can learn by observing human behaviour. So, you can demonstrate a task or literally verbally describe a task or even show it a video and it will be able to do that task."

In 2026, the company plans major capital investment, with Vaibhav noting that CapEx is expected to exceed US$20bn. "We'll be paying for six factories, namely the refinery, LFP factory, cybercab, Semi, a new mega factory and the Optimus factory," he says. "On top of it, we'll also be spending money for building our AI compute infrastructure and we'll continue investing in our existing factories to build more capacity and also the related infrastructure along with it and we'll also further expand our fleet of robotaxi and Optimus."

Chip production presents challenge

Elon identified chip production as a potential limiting factor for Tesla's growth over the next three to four years. "Completing the AI5 chip design and having it be a great chip is arguably the number-one most critical thing to get done, which is why I'm spending more time on that than currently anything else at Tesla," he says.

The CEO revealed plans for AI6, described as "yet another big leap beyond AI5", scheduled for 2026. Musk also discussed the need to build a 'TeraFab' chip plant integrating logic memory and packaging, saying: "If we don't do that, we're just going to be fundamentally limited by supply chain."

He added that, in a worst-case geopolitical situation, the impact would be dire.

This strategic focus on chip production reflects Elon's prioritisation of vertical integration to secure Tesla's technological capabilities. The planned TeraFab facility represents a significant expansion of the company's manufacturing footprint beyond vehicle production.

Regarding competition in the humanoid robotics sector, Musk anticipates the strongest challenge will come from China. "I do think that by far the biggest competition for humanoid robots will be from China," he says.

"China is incredibly good at scaling manufacturing. Actually, quite good at AI," adding that the models being distributed for free there "keep getting better".

He concluded: "So, China's very good at AI, very good at manufacturing and will definitely be the toughest competition for Tesla."