Tesla Pivots to AI and Robotics, Discontinuing Model S and X Production

Tesla has announced a strategic shift to prioritize artificial intelligence (AI) and robotics, including the Optimus humanoid robot and autonomous technologies, over its traditional electric vehicle manufacturing. The company confirmed the discontinuation of its Model S and Model X vehicle production, with the Fremont, California factory previously dedicated to these models being repurposed for Optimus robot manufacturing.

The company confirmed the discontinuation of its Model S and Model X vehicle production, with the Fremont, California factory previously dedicated to these models being repurposed for Optimus robot manufacturing.

Strategic Reorientation

During a recent quarterly earnings call, Tesla leadership, including CEO Elon Musk, outlined a future vision centered on AI and robotics. The company is de-emphasizing its flagship Model S and Model X vehicles to focus on the mass production of a humanoid robot, Optimus.

Musk indicated that the company should be viewed as a "transportation as a service" provider, anticipating that autonomous vehicles will account for the vast majority of future miles traveled.

Tesla characterized the year as a "transition from a hardware-centric business to a physical AI company."

Production of the Model S and Model X is expected to conclude next quarter, with Musk advising potential buyers to order the vehicles now. The Fremont factory, which currently manufactures these models, is slated to be repurposed for Optimus robot production, with a projected capacity of "1 million units per year."

Financial Performance and Market Position

Tesla reported $94.8 billion in revenue in 2025, with $69.5 billion (73%) derived from car sales. Automotive revenues experienced a decline of 10% year-over-year, or 11% year-over-year in 2025 according to different reports. Other revenue streams, such as energy generation and storage and services, saw an increase.

The company recorded its first annual revenue decline on record, with sales decreasing in three of the last four quarters.

For the fourth quarter, Tesla reported earnings per share of $0.50, surpassing Wall Street expectations of $0.45. Its reported revenue for the quarter was $24.9 billion, exceeding analyst estimates of $24.79 billion. However, total revenue for the quarter was down 3% year-over-year. Fourth-quarter vehicle delivery numbers showed a 16% decline year-over-year, partially attributed to reduced interest in Europe. Following these announcements, Tesla's stock increased by up to 4% in after-hours trading before moderating.

Tesla has also lost its position as the global leader in EV sales to BYD, which saw its sales grow by 28% in 2025. The Model 3 and Model Y vehicle programs are reportedly experiencing a decline, and the Cybertruck experienced a 48% decline in sales last year, according to Kelley Blue Book reports.

Focus on Autonomy and Robotics

Tesla's shift includes an increased reliance on subscription revenue from its Full Self-Driving (Supervised) software. The company disclosed 1.1 million active FSD subscriptions, a 38% increase over Q4 2024, and plans to transition FSD to a subscription-only model. While FSD offers hands-free driving, it requires driver supervision and has been subject to lawsuits and investigations regarding its safety and marketing. Federal crash data indicates Tesla robotaxis have a higher crash rate than human-driven vehicles, even with safety drivers.

Musk reiterated predictions for autonomous taxis to be available in numerous U.S. cities this year. Regarding robotics, Tesla plans to unveil the third generation of Optimus this quarter, described as its "first design meant for mass production." Musk stated that a "Gen 3" version of Optimus is anticipated to be ready for mass production by the end of 2027.

Optimus, described as a bipedal, intelligent robot designed for various tasks, will utilize a "completely new supply chain" distinct from existing vehicle supply chains. Production of Optimus is expected to commence before the end of 2026, with public sales planned for 2027. Currently, Optimus robots are primarily remote-operated and have demonstrated difficulties with basic tasks, with Musk acknowledging they are not yet significantly integrated into Tesla's factories.

These technologies, including Optimus and Robotaxis, are currently unproven and not broadly available to the public.

Investments and Compensation

Tesla anticipates capital expenditures of $20 billion in 2026, more than double the $8.5 billion spent in 2023. This investment is allocated for production lines for the Cybercab (a fully autonomous vehicle), the Tesla semi-truck, Optimus robots, and facilities for battery and lithium production. Musk noted that some of this spending, particularly on resources like lithium and cathode refineries, is driven by necessity due to external sourcing difficulties. Tesla also announced a $2 billion investment in xAI, Elon Musk's artificial intelligence firm.

Musk's potential compensation package, previously approved by shareholders, is linked to ambitious milestones, including producing over a million robots, a million robotaxis, and generating $7.5 trillion in shareholder value. One component of this package involves Musk earning $8.2 billion in stock if Tesla sells an average of 1.2 million cars annually over the next decade and reaches a $2 trillion market value by 2035. This required sales volume is lower than Tesla's 2024 sales figures.

Tesla's board and shareholders reportedly support Musk's vision for an AI and self-driving future.

Industry Context

The broader automotive industry is moving towards "software-defined vehicles" and seeking recurring subscription revenue, while car manufacturing is generally viewed as a labor-intensive, low-margin business. Despite the shift, FSD subscriptions are not expected to fully replace vehicle sales as Tesla's primary revenue source in the near term.