Tesla stock drop 2% amid NHTSA scrutiny and profit declines

Tesla shares fell 2% on Friday, reversing gains from the previous session, as the National Highway Traffic Safety Administration (NHTSA) sought information about the company’s new driver-assistance mode, dubbed “Mad Max.”

This mode, part of Tesla’s Full Self-Driving (FSD) system, reportedly allows vehicles to operate at higher speeds than other versions, with some drivers on social media reporting instances of cars exceeding posted speed limits.

NHTSA, which earlier this year opened an investigation into 2.9 million Tesla vehicles with FSD due to traffic violations and crashes, said it is gathering additional information from the company.

The agency emphasized that drivers remain responsible for complying with traffic laws, and the investigation stems from multiple reports, including six incidents in which Tesla vehicles allegedly ran red lights and caused collisions.

The “Mad Max” scrutiny adds to Tesla’s ongoing regulatory challenges, with the FSD system under review for over a year.

Tesla clarified that FSD requires active supervision and is not a fully autonomous driving system.

Despite these assurances, investor concern over potential liabilities and regulatory hurdles weighed on the stock.

Q3 profit decline despite revenue growth

Tesla’s third-quarter adjusted net income fell 29% year-over-year to $1.8 billion, below analyst expectations of $1.9 billion, while reported net income came in at $1.4 billion.

The decline was driven by rising operating costs and a sharp drop in emissions credit revenue, which fell 44% to $417 million following the US government’s reduction of penalties for missed emissions targets.

Revenue, however, increased 12% year-over-year to $28.1 billion, surpassing market estimates of $26.6 billion, supported by record vehicle deliveries of 497,099 units.

US demand was bolstered by the federal tax credit, which expired on September 30.

Despite higher sales, Tesla’s operating expenses surged 50% to $3.4 billion, largely due to investments in AI, autonomous vehicle development, and robotics.

This resulted in a 40% year-over-year decline in operating income to $1.6 billion and a contraction of automotive gross margin to 15.4%, below analyst expectations.

The company’s adjusted earnings per share of $0.50 fell short of the $0.54 estimate, marking the fourth consecutive quarter of underperformance relative to Wall Street forecasts.

While revenue gains demonstrated market demand, shrinking profitability underscored the financial impact of Tesla’s strategic pivot into robotics and advanced technologies.

Investor concerns over CEO compensation and governance

The decline in Tesla’s stock also coincides with controversy surrounding CEO Elon Musk’s proposed $1 trillion pay package, which has drawn criticism from proxy advisory firms ISS and Glass Lewis.

Both firms have urged shareholders to reject the package, citing concerns over its magnitude and potential dilution of shareholder value.

Musk defended the plan during Tesla’s earnings call, arguing that the package aligns with shareholder interests, as compensation is contingent on achieving ambitious performance targets, including vehicle sales, humanoid robot production, and robotaxi deployment.

While some analysts remain bullish, citing Tesla’s technological leadership, others have expressed caution over near-term profitability, rising operating costs, and regulatory scrutiny.

Deutsche Bank and the Royal Bank of Canada raised their price targets for Tesla stock, whereas Goldman Sachs maintained a Neutral rating, highlighting concerns over mixed performance metrics.