Elon Musk hopes he can deliver more of the Model X sports car to prove the company can scale
2020 was a challenging year but one in which Tesla smashed two records: it produced more cars in that 12 months than in its 17-year history, and celebrated its first full year of profitability.
The historic moment was one Tesla investors could relish after years of critics claiming the stock was overvalued. They had, after all, driven the company’s share price up 730pc last year.
However, a close look at the carmaker’s balance sheet suggests that Tesla still has a long journey ahead as it is not yet making its profit from selling cars.
Instead it is counting on payouts from its rivals to keep it in the black. It received $1.58bn in carbon credits from competitors in 2020 — a cash bump that stopped it from reporting a loss. In the last quarter, Tesla received $401m from sales of credits, which made up most of its $575m of profits
Tesla sells regulatory credits to competitors who want to avoid emissions fines from the governments in the US and Europe but do not have the capacity to build their own electric cars or meet the regulatory requirements. Tesla has been increasing the amount it sells every year, steadily growing from $302m to $594m in 2019.
Tesla does not disclose its customers for the initiative, however General Motors and Fiat Chrysler said they inked an agreement with the company in 2019, with Fiat Chrysler saying it would spend $2.2bn on credits over several years.
When quizzed about them on an earnings call on Wednesday, Tesla’s finance chief Zachary Kirkhorn promised that the practice would not become a “material” operation and that Tesla does not “build the business around that”.
History of Tesla
Analysts have grumbled in the past as Tesla does not provide any hints about the sales — making it difficult to predict revenue and profitability. Kirkhorn said it was impossible to forecast how much it would make on credits next year, as many of the deals it strikes are last-minute “discreet deals”. Analysts can expect them to soar in the short term, but worry Tesla will need to boost its deliveries before they phase out.
“Regulatory credits have been a crucial source of revenue, particularly for the ‘mass market’ models Tesla is rolling out at the moment, equating for more than 200pc profit,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown. “If credit revenues had ceased to exist overnight then the group would have been loss-making this year.”
Realistically, Hyett says, these credits won’t cease overnight but Tesla could see their value deteriorate over time. As rivals catch up there will be less demand for Tesla’s credits, and in addition, the supply of credits will increase.
“That would hit a crucial source of revenue,” he warned.
Tesla's Gigafactories
Instead, Tesla should be focusing on boosting the profitability of the car business, which can only happen if it rapidly ramps up its car production. Last year it only just fell shy of its 500,000 car delivery target. Chief executive Elon Musk declined to share a new target for 2021 this week, during the company’s quarterly update, but predicted that the company would improve deliveries by 50pc.
As the car industry is all about volume, Tesla will need to prove that it can produce at least that many more new cars next year before the boost from regulatory credits dissipates.
As Hyett says: "That would leave it once again reliant on the goodwill of investors to fund future growth.”
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