(CNN) – Tesla booked its first full year of net revenues in 2020, but not due to sales to its customers.
Eleven states require car manufacturers to sell a certain percentage of zero-emission vehicles by 2025. If they can’t, car manufacturers must purchase legal credits from another car manufacturer that meets those requirements, such as Tesla, which only sells electric cars.
It’s a lucrative business for Tesla, generating $ 3.3 billion over the past five years, nearly half of that in 2020 alone. The $ 1.6 billion in legal credits it received last year far exceeded net income. $ 721 million, meaning Tesla would have posted a net loss in 2020.
These guys are losing money selling cars. They make money selling credits. And the credits are disappearing, ”said Gordon Johnson of GLJ Research and one of the biggest bears on Tesla stock.
Tesla senior executives admit that the company cannot count on that source of funds to continue.
“This is always an area that is extremely difficult for us to predict,” said Tesla CFO Zachary Kirkhorn. “In the long run, regulatory credit sales will not be a substantial part of the business, and we don’t plan the business around it. For a handful of additional quarters, it can stay strong. It is also possible that this is not the case.
The 11 states that require a certain percentage of cars to be zero-emission vehicles, or that carmakers must buy credits from a company like Tesla that has exceeded the target are California, Colorado, Connecticut, Maine, Maryland, Massachusetts, New York. , New Jersey, Oregon, Rhode Island, and Vermont.
Tesla also reports other profitability measures, as do many other companies. And with those measures, the profits are so big that they don’t depend on credit sales to be in the black.
The company reported adjusted net income in 2020, excluding items such as stock-based compensation of $ 1.7 billion, or $ 2.5 billion. The automotive gross profit, which compares the total income from his auto business with the expenses directly related to building the cars, was $ 5.4 billion, even excluding income from the sale of regulated loans. And free cash flow of $ 2.8 billion was up 158% from the previous year, a big change from 2018, when Tesla consumed cash and was at risk of running out of money.
Proponents say those measures show Tesla is finally making money after years of losses on most of those measures. That profitability is one of the reasons stocks performed so well for over a year.
But the debate among the company’s skeptics and devotees about whether Tesla is truly profitable has turned into a “ holy war, ” according to Gene Munster, managing partner at Loup Ventures and a leading technology analyst.
They argue about two different things. They will never come to a solution, ”he said. Munster believes that critics are paying too much attention to how credits still outpace net income. It states that the gross profit margin in the automotive sector, excluding sales of regulated loans, is the best barometer of the company’s financial success.
“It’s a leading indicator” of that measure of Tesla’s earnings, he said. “It is not possible for GM and VW to make money from their electric vehicles on that basis.”
The future of Tesla
The high performance of Tesla stock, up 743% in 2020, makes it one of the most valuable US companies in the world. However, the 500,000 cars it sold in 2020 were a small fraction of the estimated more than 70 million vehicles sold worldwide.
Tesla shares are now worth about as much as those of the 12 largest automakers combined, who sell more than 90% of cars worldwide.
What Tesla has that other automakers don’t have is rapid growth: last week it predicted 50% annual sales growth for years to come, and it hopes to do even better than that in 2021 as other automakers struggle to backtrack. return to pre-pandemic sales levels.
The entire industry is moving towards a fully electric future, both to comply with the world’s strictest environmental regulations and to meet the growing demand for electric vehicles, in part because they require less labor and parts and cost to run. Built over traditional gasoline cars.
“One thing most people agree is that electric vehicles are the future,” said Munster. “I think that’s a safe assumption.”
Although Tesla is the largest electric vehicle manufacturer, it is facing increasing competition as virtually all automakers launch – or plan to launch – their own electric vehicles. Volkswagen has outperformed Tesla in EV sales in most of Europe. GM said last week that it hopes to switch completely to zero-emission cars by 2035.
“Competition makes Tesla cars irrelevant,” said GLJ Resarch’s Johnson. “We don’t see this as a sustainable business model.”
Other analysts argue that Tesla’s stock price is justified as it could benefit from the move to electric vehicles.
“They won’t have an 80-90% share of the EV market, but they can continue to grow even with a much smaller market share,” said Daniel Ives, technology analyst at Wedbush Securities. “We’re looking north from 3 million to 4 million vehicles per year as we move into 2025-26, with 40% of that growth coming from China. We believe they are now on the path that it will remain profitable even without the credits.