Tesla Bets Big On AI With $2 Billion XAI Deal

Tesla, the electric vehicle giant led by Elon Musk, has made a bold move to secure its future in the rapidly evolving world of artificial intelligence and autonomous vehicles. On January 28, 2026, Tesla announced a $2 billion investment in xAI, Musk’s private AI company, marking a significant step toward realizing its ambitions for self-driving technology and robotics. The announcement comes at a pivotal moment for Tesla, as it faces both financial headwinds and growing competition in the electric vehicle (EV) market.

According to Reuters, Tesla’s investment in xAI is designed to support its push into autonomous driving, a strategy Musk has long touted as the company’s next big leap. The move is also critical for investor confidence, especially after a series of missed targets and shifting timelines around Tesla’s robotaxi rollout. The company’s plans for the Cybercab—a purpose-built robotaxi—remain on track for 2026 production, with Musk expressing optimism that fully autonomous vehicles will operate in a quarter to half of the United States by the end of the year.

But this transition is not without its costs. Tesla’s Chief Financial Officer, Vaibhav Taneja, revealed that capital expenditures are set to more than double in 2026, surpassing $20 billion compared to $8.5 billion in 2025. This surge in spending reflects the company’s aggressive investment in new factories, AI infrastructure, and robotics, including the Cybercab, Semi trucks, Roadster sports cars, and the humanoid robot Optimus. As Taneja explained, these investments are necessary to position Tesla at the forefront of both the EV and AI revolutions.

The financial backdrop for these developments is complex. Tesla reported a roughly 3% decline in annual revenue for 2025, bringing in about $94.83 billion, according to Reuters. This marks the company’s first annual revenue drop—a worrying sign for a firm that has long been synonymous with rapid growth. The fourth quarter of 2025 saw net income plunge by 61% to $840 million, even as adjusted earnings per share of 50 cents beat Wall Street expectations of 45 cents, based on LSEG data.

Despite these challenges, there were bright spots. Tesla’s automotive gross margin, excluding regulatory credits, rose to 17.9% in the fourth quarter—up from 13.6% a year earlier and well above analyst forecasts. The company’s energy generation and storage segment also delivered impressive results, with revenue soaring 25.5% to a record $3.84 billion in the December quarter, outstripping analyst estimates. This segment, which includes grid-scale batteries to support renewable energy and stabilize electricity networks, has become an increasingly important pillar for Tesla as it seeks to diversify its revenue streams.

“With Tesla’s legacy EV business slowing, Tesla investors can take part in the scorching hot AI boom,” said Andrew Rocco, a stock strategist at Zacks Investment Research, as quoted by Reuters. The sentiment is echoed by many on Wall Street, who see the pivot to AI and robotics as vital to justifying Tesla’s lofty $1.5 trillion valuation. Still, the company’s core EV business faces mounting pressure, with competitors launching newer, often cheaper models, and the loss of a U.S. tax incentive further dampening demand.

One of the most consequential changes announced by Musk was the end of production for the Model S and Model X—Tesla’s flagship vehicles that once helped establish its reputation as an industry leader. As reported by The Wall Street Journal, sluggish sales of these higher-end models prompted the decision. The factory space in Fremont, California, previously dedicated to these vehicles, will now be repurposed for the production of Optimus robots, an ambitious move that underscores Tesla’s commitment to robotics and automation.

The company’s shift in focus has not been without controversy. Tesla shareholders had previously rejected a proposal to invest in xAI, with more “no” votes and abstentions than “yes” votes, according to The Wall Street Journal. Despite this, Tesla’s board went ahead with the $2 billion investment as part of xAI’s Series E funding round. SpaceX, another Musk-led enterprise, also invested $2 billion in xAI, which is positioning itself as a competitor to OpenAI.

Investor reactions have been mixed. Shares of Tesla rose about 3.5% in after-hours trading following the announcement, before paring gains to 1.8% as details of the increased capital expenditures emerged. Thomas Monteiro, a senior analyst at Investing.com, told Reuters, “(That) makes rollout metrics—not deliveries—the most important leading indicator from here.” The implication is clear: investors are now more focused on the progress of Tesla’s self-driving and robotaxi initiatives than traditional vehicle sales numbers.

Musk’s ambitious forecasts for autonomous vehicles have not always materialized on schedule. He has previously predicted that robotaxis would reach half of the U.S. population by the end of 2025, only to later narrow the goal to deployment in the top eight to ten metropolitan areas. So far, Tesla’s robotaxi service is limited to Austin, Texas. Regulatory hurdles also loom large, especially as the Cybercab is designed without a steering wheel or pedals—features that currently run afoul of federal design standards.

Production of the Cybercab and the Optimus humanoid robot is expected to be “agonizingly slow” at first, Musk admitted last week, before ramping up over time. Significant production volume for Optimus is not anticipated until the end of 2026. Meanwhile, Musk has warned about a brewing shortage of memory chips that could threaten Tesla’s plans, suggesting the company may need to build its own chip-making plant to safeguard supply chains. “If we don’t do that, we’re just going to be fundamentally limited by supply chain,” Musk cautioned, highlighting the risks posed by global semiconductor constraints and geopolitical tensions.

Despite these challenges, Tesla’s shares have climbed about 11% in 2025, buoyed in part by an $878 billion pay package for Musk tied to ambitious operational and valuation milestones. The compensation plan has reassured some investors of Musk’s commitment to Tesla, even as he juggles other business and political interests.

As Tesla enters what its executives call a “transition phase,” the company is asking investors to look beyond short-term sales and profit figures and instead focus on the potential of its AI, robotics, and energy businesses. Whether Musk and his team can deliver on these promises—and whether regulators, supply chains, and consumers will come along for the ride—remains to be seen. But one thing’s for sure: Tesla is betting big on a future where cars drive themselves, robots build the factories, and artificial intelligence is at the heart of it all.