Tesla - Crossroads between cars, credits and cults
Tesla had a profitable year first time in '20. But were the profits really from selling electric cars or something else? Find out in today's FinnFriday...
The year 2020 might have been one of the worst year for the humankind in the last century, but for Tesla, it was the first full year of profitability. Sounds astonishing right? Already selling half a million cars per year now and existing since 2009, it took more than a decade to reach profitability. But wait a minute, there’s more surprise behind these profit numbers. Tesla did not make any profits this year too from its core business of selling cars. Rather all its earnings were from selling regulatory credits. To be precise just $721 Mn. came from cars revenue and a whopping $1.58 billion came from selling regulatory credits. In fact, if only revenue of cars had to be considered then Tesla would have been in loss only this year too. So, let’s see what’s this regulatory bonanza is…
Certain states in the USA award regulatory credits to automakers selling electric vehicles. Automakers must acquire a minimum number of these credits to comply with regulatory requirements and this gives rise to the buying and selling of these credits. Those automakers that do not sell enough electric cars can buy credits from other automakers that do. This attempt was to encourage electric car manufacture in the United States, but it seems that it ended up essentially subsidizing Tesla’s loss-making car operation. Since Tesla only makes electric cars, it’s able to sell truckloads of credit to other automakers those are unwilling or unable to produce enough electric cars.
Perfect example of how somebody’s loss can be somebody else’s profit!
But this credit party of Tesla seems to be getting over soon. Automakers have now started ramping up their electric car production - the biggest example being of General Motors who is pouring billions of dollars every year and ready to unveil dozens of electric models very soon. GM has also unveiled a commercial vehicle in the electric category and it’s sure shot going to be a hit because of its tie up with FedEx as the supplier for their fleet.
So, this brings us to the next question that why such high valuation of Tesla? Currently Tesla is valued at almost $800 Bn. which is almost 4x of Toyota even though Toyota sold 10 million vehicles this year '20 as compared to half a million vehicles sold by Tesla during same time. So it’s basically the vision and cult following of Elon Musk that has been driving the valuations of Tesla crazy high. For the year’20, Teslas’s lofty stock performance of almost 743% makes it one of the most valuable US companies in the world and its shares are now worth roughly as much as those of the combined 12 largest automakers who sell more than 90% of the autos globally.
The expectations from Musk are high with analysts safely assuming that by 2025-26, Tesla would be manufacturing close to 3 million to 4 million EVs per year. That is almost 57% CAGR in next 5 years which is driving the stock rally of Tesla. The kind of visionary Musk is, we assume that he will deliver on these figures… Until then don’t forget to subscribe our newsletter to keep getting these interesting stories delivered to your inbox.
By: Anmol Gupta | Isha Garg