Tesla’s Dirty Little Secret – Its net profit doesn’t come from selling cars

Tesla Declares Its First Year With Net Profits In 2020, But This Is Not Due To Car Sales To Its Customers.

Eleven states require automakers to sell a certain percentage of zero-emission vehicles by 2025. If they cannot, automakers should buy regulatory credits or ZEV credits (Zero-Emission Vehicles, CO2 credits) from another automaker that meets these requirements, such as Tesla, which produces and sells exclusively electric vehicles.

For Tesla, this is a lucrative business: over the past five years, this has brought the company $ 3.3 billion, which is almost half in 2020 alone. The $ 1.6 billion in regulatory loans received last year far exceeded Tesla’s $ 721 million net profit, which means Tesla would have suffered a net loss in 2020..

«These guys are losing money selling cars. They make money by selling loans. And the loans go away», – said Gordon Johnson (Gordon Johnson) of GLJ Research and one of the largest short investors in Tesla.

Tesla executives admit the company cannot count on this source of cash to continue..

«This has always been an area that is extremely difficult for us to predict.», – said the chief financial officer of Tesla Zachary Kirkhorn (Zachary Kirkhorn). «In the long term, sales of regulatory loans will not be a significant part of the business, and we are not planning a business around it. It is possible that it will remain strong for several additional quarters. It is also possible that this will not be the case.».

11 states that require a certain percentage of cars to be zero emissions, or that carmakers buy loans from a company like Tesla that has exceeded their target are California, Colorado, Connecticut, Maine, Maryland, Massachusetts, New York New Jersey, Oregon, Rhode Island and Vermont.

Tesla also reports other profitability metrics, as do many other companies. And according to these indicators, the profit is large enough not to depend on the sale of loans in order to be in the black..

Tesla's bottom line doesn't come from car sales

The company reported adjusted net income for 2020, excluding items such as compensation in the form of stock options of $ 1.7 billion out of a total of $ 2.5 billion. Tesla’s gross vehicle profit, which compares total revenue from automotive business with expenses directly attributable to vehicle assembly totaled $ 5.4 billion, even excluding proceeds from sales of regulatory loans. And its free cash flow of $ 2.8 billion is up 158% from a year earlier, a significant change from 2018, when Tesla was burning cash and was at risk of running out of money..

The auto giant’s supporters say the measures show Tesla is finally making money after years of losses. This profitability is one of the reasons the company’s stock has performed so well for over a year..

But the debate between skeptics and supporters of the company over whether Tesla is truly profitable has turned into «holy war», as he thinks Gene Munster (Gene Munster), Managing Partner at Loup Ventures and Lead Technical Analyst.

«They are discussing two different things. They will never come to a decision», – he said. Münster thinks critics are paying too much attention to the fact that loans still exceed bottom line. He argues that gross margins in the automotive industry, excluding regulatory sales loans is the best barometer of a company’s financial success.

«This is the leading indicator» Tesla’s profit margin, he said. «There is no chance GM and VW are making money this way on their EVs.».

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