New York (CNN Business)Tesla posted its first full year of net income in 2020 -- but not because of sales to its customers.
Eleven
states require automakers sell a certain percentage of
zero-emissions vehicles by 2025. If they can't, the automakers
have to buy regulatory
credits from another automaker that
meets those requirements -- such as Tesla, which exclusively
sells electric cars.
It's
a lucrative business for Tesla -- bringing in $3.3 billion over
the course of the last five years, nearly half of that in 2020
alone. The $1.6 billion in regulatory credits it received last
year far outweighed Tesla's net
income of $721 million -- meaning Tesla
would have otherwise posted a net loss in 2020.
"These
guys are losing money selling cars. They're making money selling
credits. And the credits are going away," said Gordon Johnson of
GLJ Research and one of the biggest bears on Tesla (TSLA) shares.
Tesla
top executives concede the company can't count on that source of
cash continuing.
"This
is always an area that's extremely difficult for us to
forecast," said Tesla's Chief Financial Officer Zachary
Kirkhorn. "In the long term, regulatory credit sales will not
be a material part of the business, and we don't plan the
business around that. It's possible that for a handful of
additional quarters, it remains strong. It's also possible
that it's not."
The
11 states which will require a certain percentage of cars to
be zero emission vehicles, or the automakers to purchase
credits from a company like Tesla which has exceeded the
target, are California, Colorado, Connecticut, Maine,
Maryland, Massachusetts, New York, New Jersey, Oregon, Rhode
Island and Vermont.
Tesla
also reports other measures of profitability, as do many other
companies. And by those measures, the profits are great enough
that they do not depend on the sales of credits to be in the
black.
The
company reported 2020 adjusted net income, excluding items
such as $1.7
billion stock-based compensation, of $2.5 billion. Its
automotive gross profit, which compares total revenue from its
car business to expenses directly associated with the building
the cars, was $5.4 billion, even excluding the regulatory
credits sales revenue. And its free cash flow of $2.8 billion
was up 158% from a year earlier, a dramatic turnaround from
2018 when Tesla was burning
through cash and in danger
of running out of money.
Its
supporters say those measures show Tesla is making money at
last after years of losses in most of those measures. That
profitability is one of the reasons the stock performed so
well for more than a year.
But
the debate between skeptics and devotees of the company
whether Tesla is truly profitable has become a "Holy War,"
according to Gene Munster, managing partner of Loup Ventures
and a leading tech analyst.
"They're
debating two different things. They'll never come to a
resolution," he said. Munster believes critics focus too much
on how the credits still exceed net income. He contends that
automotive gross profit margin, excluding those sales of
regulatory credits, is the best barometer for the company's
financial success.
"It's
a leading indicator," of that measure of Tesla's profit, he
said. "There's no chance that GM and VW are making money on
that basis on their EVs."
The future of Tesla
Tesla's lofty
stock performance -- up 743% in 2020
-- makes it one of the most
valuable US companies in the world.
Yet the 500,000 cars it sold in 2020 were a sliver of more
than 70 million vehicles estimated to have been sold
worldwide.
Tesla
shares are now worth roughly as much as those of the combined
12 largest automakers who sell more than 90% of autos
globally.
What
Tesla has that other automakers don't is rapid growth -- last
week it forecast annual sales growth of 50% in coming years,
and it expects to do even better than that in 2021 as other
automakers struggle to get back to pre-pandemic sales levels.
The
entire industry is moving toward an all-electric future, both
to meet tougher environmental regulations globally and to
satisfy the growing appetite for EVs, partly because they
require less labor, fewer parts and cost less to build than
traditional gasoline-powered cars.
"Something
most people can agree on is that EVs are the future," said
Munster. "I think that's a safe assumption."
While
Tesla is the leading maker of electric cars, it faces
increased competition as virtually every automaker rolls out
their own EVs, or plan to do so. Volkswagen
has passed Tesla in terms of EV sales
in most of Europe. GM said last week it hopes to shift
completely to emissions-free
cars by 2035.
"The
competition is rendering Tesla's cars irrelevant," said GLJ'
Resarch's Johnson. "We do not see this as a sustainable
business model."
Other
analysts contend Tesla's share price is justified given how it
can benefit from the shift to electric vehicles.
"They're
not going to stay at 80-90% share of the EV market, but they
can keep growing even with much lower market share," said
Daniel Ives, a technology analyst with Wedbush Securities.
"We're looking at north of 3 million to 4 million vehicles
annually as we go into 2025-26, with 40% of that growth coming
from China. We believe now they are on the trajectory that
even without [the EV] credits they'll still be profitable."