For years, Tesla’s profit story had two reliable pillars: industry-leading margins on its vehicles and a lucrative side business selling regulatory credits to rival automakers that needed them to comply with emissions rules. Both pillars are now eroding, and the company’s audited financials for 2025 show a different profit engine gaining ground: energy storage.
The shift is not subtle. Tesla’s annual 10-K filing for the fiscal year ended December 31, 2025, reveals that automotive gross margins, excluding regulatory credits, continued a multi-quarter slide. The 10-Q filing for the quarter ended September 30, 2025, puts the figure at approximately 17.1%, down from roughly 18.9% in the year-earlier period, well below the 20% levels the company once treated as a floor. Meanwhile, the energy generation and storage segment posted gross margins above 26% in several quarters, a performance that would have been unthinkable when Tesla’s Powerwall was still a niche product.
The auto margin squeeze
Tesla’s car business is caught between forces that pull in opposite directions. On one side, the company has cut vehicle prices repeatedly since late 2022 to defend market share against a wave of cheaper Chinese EVs led by BYD and a growing roster of competitive models from legacy automakers like Ford and GM. On the other, input costs for raw materials, labor, and logistics have not fallen at the same pace.
The Q3 2025 10-Q spells out the result: automotive gross margin excluding credits fell to approximately 17.1%, down from about 18.9% a year earlier, with management citing pricing adjustments and lower regulatory credit contributions as key factors. Tesla’s own risk disclosures acknowledge that as competitors electrify their fleets, the pool of buyers for its surplus credits is shrinking.
Regulatory credit revenue remains material. Tesla reported approximately $2.07 billion in credit sales for fiscal 2025, a figure that still flows directly to the bottom line with virtually no associated cost. But the trajectory is clear. As automakers like Hyundai, Volkswagen, and Stellantis expand their own EV lineups, fewer of them need to buy credits from Tesla to satisfy mandates under programs like California’s Zero-Emission Vehicle regulation, governed by Title 13, Section 1962.2 of the California Code of Regulations. Tesla flags this dynamic explicitly in its 10-K as a forward-looking risk.
Energy storage steps into the gap
While the car division grinds through margin compression, Tesla’s energy segment is having a breakout stretch. Megapack, the company’s utility-scale battery storage product, has driven a surge in deployments that pushed energy segment revenue and margins sharply higher through 2025. The 10-K confirms that energy generation and storage gross margins expanded meaningfully, outpacing the automotive segment for the first time in a sustained way.
The growth has real infrastructure behind it. Tesla’s Megafactory in Lathrop, California, is now producing Megapacks at scale, and a second Megafactory in Shanghai is ramping production to serve international markets. Utility customers in the United States have also benefited from incentives under the Inflation Reduction Act, including Section 45X manufacturing credits that improve the economics of domestically produced battery storage systems.
On Tesla’s recent earnings calls, CEO Elon Musk has repeatedly described energy storage as a business that could eventually rival or exceed the automotive division in scale. That claim remains aspirational, but the financial data is starting to lend it credibility. Grid-scale storage demand is being driven by the global buildout of renewable energy, which requires batteries to smooth out the intermittent output of solar and wind farms. Research firm BloombergNEF has projected that global energy storage installations will need to grow several-fold by 2030 to meet grid reliability targets, a tailwind that plays directly to Tesla’s manufacturing capacity.
What the filings do not answer
Tesla’s SEC filings confirm the direction of these trends but leave important questions open. The company does not break out granular cost drivers within the energy segment, such as battery cell procurement costs, installation expenses, or the specific contribution of IRA incentives to its margins. That makes it difficult for outside observers to model how durable the energy segment’s profitability will be if subsidies change or lithium-ion cell prices fluctuate.
Forward guidance is similarly thin. Tesla’s management discussion sections explain why margins moved the way they did in 2025, but they do not offer specific revenue or margin targets for the energy business in 2026. Analyst estimates circulating in secondary coverage should be treated as interpretive, not confirmed by the company.
The global picture for regulatory credits also has gaps. California’s ZEV dashboard tracks credit generation under that state’s program, but Tesla sells credits across multiple state and federal frameworks, as well as in international markets including the European Union. No single public database captures the full scope of Tesla’s credit sales or the pricing it receives.
Where the profit center of gravity is heading
Taken together, Tesla’s audited filings for 2025 paint a picture of a company whose profit center of gravity is shifting. The automotive business still generates the bulk of revenue, but its margins are under pressure from competitive pricing and a fading credit tailwind. The energy storage segment, once a rounding error on the income statement, is now contributing meaningful margin dollars and growing faster than the car division.
For investors parsing Tesla’s next chapter, the key question is not whether the rebalancing is happening. The SEC filings confirm that it is. The question is whether energy storage margins can hold up as the segment scales, whether utility demand will sustain the deployment pace that powered 2025’s gains, and whether the regulatory credit business will decline gradually or fall off a cliff as EV adoption accelerates industry-wide.
Those answers are not yet in the audited numbers. But the direction of travel, documented in filings Tesla’s officers signed under penalty of law, is no longer ambiguous. The company that built its reputation on selling cars is increasingly earning its keep by storing electricity.
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*This article was researched with the help of AI, with human editors creating the final content.
