Tesla Inc. disclosed a $2 billion investment in Elon Musk’s xAI, acquiring Series E preferred shares despite a shareholder vote last November that failed to approve such a move due to significant abstentions. The deal, announced in Tesla’s Q4 2025 shareholder update on January 28, 2026, comes as the electric-vehicle maker reported quarterly profit beating Wall Street estimates even amid its first-ever annual revenue decline. "On January 16, 2026, Tesla entered into an agreement to invest approximately $2 billion to acquire shares of Series E Preferred Stock of xAI as part of their recent publicly-disclosed financing round," the company stated in its official update letter.

The investment aligns with Tesla’s push under Master Plan Part IV to deploy AI in the physical world, complementing xAI’s digital models like Grok. Tesla and xAI signed a framework agreement to explore collaborations, building on existing ties such as Megapack sales to xAI data centers and Grok integration in Tesla vehicles. The stake, on market terms matching other investors like Nvidia and Cisco in xAI’s $20 billion round, awaits regulatory approval for a Q1 2026 close. Tesla ended 2025 with $44.1 billion in cash and equivalents, providing ample firepower despite the outlay representing less than 1% of its $1.5 trillion market cap.

In November 2025, Tesla shareholders narrowly favored an xAI investment—1.06 billion votes for versus 916 million against—but 473 million abstentions, treated as opposition under bylaws, sank the nonbinding proposal. "While more votes were cast in favor of the proposal than against, a significant number of shareholders abstained," Tesla noted then, prompting board review. Critics on X highlighted the override, with one user posting, "Tesla Board: ‘Do you guys want us to invest in xAI?’ Shareholders: ‘Nah, not really…’ Tesla Board: ‘Ok then… well, anyway, we just invested $2B.’"

Revenue Slump Masks AI Pivot

Tesla’s full-year 2025 revenue fell 3% to $94.8 billion, the first annual drop, driven by an 8.6% plunge in vehicle deliveries to 1.64 million units and automotive sales down 10% to $69.5 billion, per Ars Technica. Q4 revenue dipped 3% to $24.9 billion, missing some forecasts but topping others, with automotive down 11% to $17.7 billion. Energy storage shone, surging 27% yearly to $12.8 billion on 46.7 GWh deployments, including a Q4 record of 14.2 GWh yielding $3.8 billion in revenue and $1.1 billion gross profit—its fifth straight quarterly high.

Profit metrics weakened sharply: GAAP net income crashed 46% to $3.8 billion annually and 61% to $840 million in Q4, with EPS at $0.24 versus $0.60 a year prior. Non-GAAP EPS hit $0.50 in Q4, edging past the $0.45 consensus. Operating expenses jumped 23% amid AI R&D, compressing margins to 4.9% from 7.2%, as regulatory credits propped up 52% of net profit. "EV deliveries declined and margins stayed compressed, keeping the legacy auto outlook challenging," analysts noted in ZeroHedge.

Full Self-Driving subscriptions doubled to 1.1 million users, up 38%, signaling software traction. Services revenue climbed 19% to $12.5 billion. Operating cash flow held at $14.7 billion yearly, free cash flow rose 74% to $6.2 billion, bolstering liquidity.

Vote Backlash and Musk Ties

The xAI bet revives governance tensions. A shareholder lawsuit accuses Musk of diverting Tesla AI talent and resources to xAI, seeking transfer of his xAI equity to Tesla, as detailed by Electrek. xAI, burning $1 billion monthly, raised $20 billion at a $230 billion valuation. SpaceX invested $2 billion earlier. Tesla supplies Megapacks; Grok powers vehicle features. Musk founded xAI in 2023 without initial Tesla disclosure.

November’s vote followed Musk’s July 2025 openness to Tesla stakes in xAI, ruling out merger. "If it were up to me, Tesla would have invested in xAI long ago," he posted then. Abstentions from giants like Vanguard and BlackRock fueled failure, per X discussions. Post-announcement, Tesla shares rose over 3% in after-hours, reflecting AI optimism over auto woes.

xAI eyes humanoid AI for robots like Optimus. Tesla plans Optimus Gen 3 unveil in Q1 2026, volume production by year-end at 1 million units capacity. Cybercab robotaxi and Semi truck production starts 2026 at Giga Texas, alongside Megapack 3.

Physical AI Infrastructure Surge

"2025 marked a critical year for Tesla as we further expanded our mission and continued our transition from a hardware-centric business to a physical AI company," Tesla’s letter declared. FSD v14 advances with end-to-end models from fleet data—500 driving years daily. AI5 chip targets 50x performance leap in 2027; Cortex 2 doubles Giga Texas compute mid-2026.

Energy deployments hit records: Powerwall network enabled 89,000 Virtual Power Plant events across 1 million units, saving $1 billion in bills, per Teslarati. Capex fell 14% to $2.4 billion in Q4 but will rise in 2026 for AI infra, six new lines in vehicles, robots, energy.

Wall Street eyes 1.77 million 2026 deliveries, up 8%, via cheaper Model 3/Y. Rivals’ pricing wars, ended U.S. EV tax credits, and Musk’s politics dented demand. Yet AI narrative propelled shares up 11% in 2025, lagging S&P but dwarfing peers.

Strategic Synergies Fuel Growth Bets

The xAI framework "enhances Tesla’s ability to develop and deploy AI products and services into the physical world at scale," per the update. Grok aids navigation; potential Optimus ties loom. "Tesla’s investment was made on market terms consistent with those previously agreed to by other investors," TechCrunch reported.

Reactions split: Bulls hail vertical integration; bears decry "cash furnace" for Musk’s empire. X users praised ecosystem weave, one calling it "securing the refining capacity for the new oil (Intelligence)." Tesla’s $44 billion war chest supports bets amid 6% pretax margins, half Toyota’s.

2026 guidance: Robotaxi in top metros, FSD regulatory pushes in China/Europe, domestic cathode/LFP production. As Musk pivots Tesla to AI, the xAI stake underscores intertwined fates, testing if physical-digital fusion justifies premiums over auto realities.