The bitter truth bothers Elon Musk: Tesla makes a profitable business not by selling cars!
- Tram Ho
Tesla has just for the first time in history recorded a profitable full year in 2020. However, the bitter truth is that the profit they have did not come from the sale of cars.
There are currently 11 states in the US that require automakers to sell a certain percentage of zero-emissions cars by 2025. Without doing so, automakers are forced to buy. Emission credits from other automakers to meet these requirements. And Tesla is such a company that it sells exclusively electric cars.
This is clearly a profitable business for Tesla as it brought in $ 3.3 billion in the past five years, with nearly half of that coming alone in 2020. Selling $ 1.6 billion in credits Last year’s emissions were far greater than Tesla’s net profit of $ 721 million – meaning that Tesla should have announced a loss by 2020.
” This company is at a loss when it comes to selling electric cars. They make money selling emissions credits that are slowly disappearing, ” said Gordon Johnson – from research firm GLJ Research.
The company’s top executives also believe that they can no longer make money from this source.
” This has always been an extremely difficult area to predict for us ,” said Tesla Chief Financial Officer Zachry Kirkhorn. ” In the longer term, emissions credit sales will not be a part of the revenue contribution anymore and we don’t have a business plan with it either. Maybe over the next few quarters it will continue to carry.” Good sales or maybe not .
Currently, 11 states require companies to purchase emissions credits including California, Colorado, Connecticut, Maine, Maryland, Massachusetts, New York, New Jersey, Oregon, Rhode Island and Vermont.
The next thing worth noting is that Tesla uses very different methods of calculating profits from the rest of the companies. According to their calculation, the profits will be large enough that the company does not depend on the sales of the emission credits.
The company reports adjusted revenue for 2020 that excludes $ 1.7 billion (out of a $ 2.5 billion in total) in equity compensation. Their gross profit compared with the total revenue from the car business with the costs directly related to the car making is $ 5.4 billion excluding sales of emissions credits. And the company’s free cash flow hit $ 2.8 billion, up 158% year over year – a significant change from 2018 when Tesla was burning a lot of money and potentially running out of money.
Supporters of Tesla say that this calculation shows that Tesla is making money after many losses, even using those accounting methods. This profit margin is one of the reasons company shares have risen so well over the past year.
However, the controversy that erupted between its supporters and critics is its true profitability.
” They are arguing two completely different issues and will never be able to solve it .” Munster believes that critics are focusing too much on why emissions credit sales still exceed Tesla’s net profit.
He argues that auto industry gross margins, excluding sales of new regulatory emissions credits, are the best measure of a company’s financial success. ” It’s the leading metric ” for measuring Tesla’s profits, he said. ” There’s no chance for GM and VW to make money on that basis based on their electric vehicle lineup .”
So what is the future of Tesla?
Tesla shares have risen dramatically in the past year at 743% – making them one of the most valuable companies in the world. However, the 500,000 electric cars sold in 2020 are miniscule compared with the 70 million expected to be sold globally.
Tesla’s capitalization is now nearly as valuable as the 12 largest automakers combined, those that sell more than 90% of global cars.
What Tesla has that other automakers don’t have is its rapid growth. Last week, they forecast a 50% growth in annual sales over the next few years, and they forecast to do better in 2021 than other automakers struggling with the pandemic.
The entire industry is moving towards an all-electric future, both to meet stricter global environmental regulations and to meet the growing demand for electric vehicles, which require less labor. more dynamic, fewer parts and lower manufacturing costs than traditional gasoline cars.
” What most people can’t deny is that electric cars are the future ,” said Munster. ” I think that’s a safe assumption. ”
But while Tesla is currently the leading manufacturer of electric cars, it faces increasing competition as almost every automaker either launches their own electric cars or plans. do like that. Volkswagen has overtaken Tesla in electric vehicle sales in most European countries. Last week, GM said it hopes to transition entirely to zero-emission cars by 2035.
” The competition is leaving Tesla cars out of line ,” said GLJ ‘Resarch’s Johnson. ” We do not see this as a sustainable business model .”
Other analysts are more optimistic that Tesla’s share price is justified as they can benefit from the switch to electric vehicles.
” Tesla won’t hold 80-90 percent of the EV market, but it can keep growing even with a much lower market share, ” said Daniel Ives, technology analyst at Wedbush Securities . Ants have between 3 million and 4 million vehicles a year entering the period 2025-26, with 40% of that growth coming from China.We also believe that now Tesla is in a trajectory that even if it does. without emissions credits the company will still be profitable . ”
Source : Genk