Tesla’s dirty little secret: his net profit doesn’t come from selling cars

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Eleven states require carmakers to sell a certain percentage of zero-emission vehicles by 2025. If they can’t, carmakers have to buy regulatory credits from another carmaker that meets these requirements – such as Tesla, which sells exclusively electric cars.
It’s a profitable business for Tesla – bringing in $ 3.3 billion over the past five years, almost half of it in 2020 alone. The $ 1.6 billion regulatory credits it received last year far exceeded revenue. Tesla’s net worth of $ 721 million – which means Tesla would have a net loss in 2020.
“These guys are losing money by selling cars. They’re making money by selling loans. And the loans are going to go away,” said Gordon Johnson of GLJ Research and one of the biggest bears on Tesla (TSLA) actions.

Tesla executives acknowledge that the company cannot rely on the continuation of this source of cash.

“This is always an extremely difficult area for us to predict,” said Tesla Chief Financial Officer Zachary Kirkhorn. “In the long run, sales of regulatory loans will not be an important part of the business and we do not plan the business in this regard. It is possible that, for a handful of extra quarters, it remains strong. It may also not be. “

Tesla reports other cost-effectiveness measures, as do many other companies. And by these measures, profits are high enough not to depend on credit sales to be black.

The company reported adjusted net income in 2020, excluding items such as $ 1.7 billion and $ 2.5 billion in share compensation. Its gross profit in the automotive industry, which compares the total revenue from its business to the costs directly associated with building cars, was $ 5.4 billion, excluding revenues from sales of regulatory loans. And the $ 2.8 billion free cash flow increased 158 percent from a year earlier, a dramatic change in 2018, when Tesla burned with cash and risked running out of money.

Proponents of her case have been working to make the actual transcript of this statement available online. This profitability is one of the reasons why the stock has evolved so well for more than a year.

But the debate between skeptics and company followers over whether Tesla is truly profitable has become a “Holy War,” according to Gene Munster, an executive partner at Loup Ventures and a leading technology analyst.

“Two different things are being debated. They will never reach a resolution,” he said. Munster believes critics are focusing too much on how loans still exceed net income. He argues that the car gross profit margin, excluding sales of regulatory loans, is the best barometer for the company’s financial success.

“It’s a leading indicator” of this measure of Tesla’s profit, he said. “There is no chance that GM and VW will make money on this basis on their EVs.”

The future of Tesla

Tesla’s high stock performance – up 743% in 2020 – makes it one of the most valuable American companies in the world. However, the 500,000 cars it sold in 2020 were a piece of more than 70 million vehicles estimated to be sold worldwide.

Tesla shares are now worth as much as those of the top 12 automakers that sell more than 90% of their cars globally.

What Tesla has that other automakers don’t have is rapid growth – last week it forecast annual sales growth of 50% in the coming years and expects it to do even better than in 2021, in time what other automakers are struggling to return to pre-pandemic sales levels.

Tesla disappoints Wall Street despite strong profits

The entire industry is moving towards a fully electric future, both to meet tougher environmental regulations globally and to satisfy the growing appetite for electric vehicles, in part because it requires less labor, fewer parts. and it costs less to build than traditional gasoline-powered cars.

“Something most people can agree on is that electric vehicles are the future,” Munster said. “I think that’s a safe assumption.”

While Tesla is the largest manufacturer of electric cars, it faces increased competition, as almost every car manufacturer launches its own electric vehicles or intends to do so. Volkswagen has overtaken Tesla in terms of sales of electric vehicles in most of Europe. GM said last week that it hopes to switch to emissions-free cars by 2035.

“Competition makes Tesla cars irrelevant,” said Johnson Resarch of GLJ. “We don’t see this as a sustainable business model.”

Other analysts argue that Tesla’s share price is justified, given how it can benefit from switching to electric vehicles.

“They will not remain at 80-90% share of the EV market, but they can continue to grow even with a much smaller market share,” said Daniel Ives, a technology analyst at Wedbush Securities. “We look north at 3 million to 4 million vehicles a year as we enter 2025-26, with 40% of that growth coming from China. We believe that now I am on that trajectory, even without [the EV] loans that will continue to be profitable. ”

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