Tesla's profit margin is getting hammered by EV discounts and hefty AI spending

As Tesla CEO Elon Musk continues to make lofty promises about his company's future in autonomous driving and robotics, investors keep watching profit margins deteriorate.

In missing Wall Street estimates for second-quarter earnings on Tuesday, Tesla said its adjusted operating margin shrank to the lowest in three years, dropping to 14.4% from 18.7% a year earlier. It's the fourth straight quarter of shrinkage.

The company reported just $1.48 billion in net income on revenue of $25.5 billion, which included $890 million in regulatory credits.

Tesla is getting hit from both sides. Expenses are soaring as the company spends on the artificial intelligence infrastructure Musk says is needed to turn Tesla EVs into self-driving cars, and to develop humanoid robots capable of doing factory work and more.

Meanwhile, deliveries of Tesla's most popular electric vehicles have been dropping this year, and the company has responded by slashing prices and offering other incentives like low-interest loans.

"Affordability remains top of mind for customers," said Vaibhav Taneja, Tesla's chief accounting officer, on the company's earnings call. "And in response, in Q2, we offered attractive financing options to offset sustained high interest rates."

Tesla shares tumbled about 8% in extended trading on Tuesday to $227.23. They were down less than 1% for the year as of the close, while the Nasdaq was up 20% over that stretch.

Tesla said in its investor deck that the decline in operating income was due in part to the reduced average selling price and lower deliveries of its top EVs. Automotive revenue fell 7% from a year earlier, the second straight decline, as competition ramped up, most notably in China.

Tesla began offering a five-year, zero