Tesla’s secret: selling cars does not make money last year’s profits from another source

tesla‘s main source of profit is not selling cars, but selling regulatory credits.

Tesla recently reported its first full-year profit in 2020 – but not from selling cars to customers.

CNN reports that 11 U.S. states require automakers to sell a certain percentage of zero-carbon emissions vehicles by 2025. Carmakers who can’t do that must buy regulatory credit from other carmakers who meet the requirement, such as Tesla, which specializes in electric cars.

It’s a lucrative business for Tesla – $3.3 billion in the past five years, with nearly half occurring in 2020. Last year’s revenue from the sale of regulatory credit was $1.6 billion, far exceeding net income of $721 million, meaning that if not for the money, Tesla would have been in the red in 2020.

Gordon Johnson, founder and chief executive of GLJ Research, one of Tesla’s biggest short sellers, said, “These guys are losing money selling cars. They make money by selling regulatory credits.

Tesla’s top executives admit they can’t expect that cash income to keep coming in. That revenue has been difficult to predict,” said Zachary Kirkhorn, the company’s chief financial officer. Long-term, revenue from regulatory credits will not be a significant part of the business, and our business plan is not focused on that. It’s possible that it will remain strong in the next few quarters, or maybe not.

The company’s earnings report has other measures of profitability, emphasizing that profits are big enough not to rely on sales of regulatory credits: its automotive business had gross profit of $5.4 billion, which excludes revenue from sales of regulatory credits; free cash flow was $2.8 billion, up 158% from a year ago, very different from the crisis of almost burning through cash and having a shortfall in funding back in 2018.

According to Gene Munster, a partner at venture capital firm Loup Ventures, the two factions questioning and defending whether Tesla is actually making money have almost descended into a kind of ‘holy war’.

They debate two different issues and won’t come to a conclusion,” he noted. Munster argues that critics focus too much on regulatory credits over net income, but that gross profit from the auto business without regulatory credit revenue is the best barometer of financial performance, and that GM and Fossil’s electric cars just don’t make that much.

Other analysts believe that the auto industry is moving toward an all-electric future and that Tesla is benefiting from this transition with a reasonable stock price.

Their share of the EV market will not stay at 80-80%,” said Daniel Ives, a technology stock analyst at securities firm Wedbush Serurities. By 2025-2026, it is expected to produce more than 3 to 4 million units per year, with 40% of the growth coming from China. We believe they can still make money even without regulatory credit.