Tesla for the long run?

[oneill225]

I was looking at this article from October in US News, which said

Assuming that Tesla is pouring as much into their infrastructure and growth as possible, why would we expect that they would not spend the emissions credits? These are negotiated amounts that were known ahead of time and that will continue to some degree into the near future. In other words Tesla knew the money would be there and they spent it. Why not assume that Tesla would have adjusted spending down a corresponding amount without the credits?

This is a non-issue, in my eyes.

 

[Qs Laptop]

I was looking at this article from October in US News, which said

Yes, those are Q3 numbers.

This statement from the article is likely false:

Revenue from the sale of regulatory credits made up $397 million. Without that revenue, Tesla would not have achieved a profitable quarter.


$397M in emission credit revenue out of $8.77B in revenues is only 4.5% of total revenues. Tesla had a gross profit margin of 23.5% in Q3. Are we to believe that if they missed this $397M in revenues they would have been unprofitable?

They showed a net profit of $331M on $8.77B in revenues for Q3. That is a net profit margin of 3.78%. Therefore, had they not received the $397M in emission credit revenues they would have missed out on $15M in net profit, which would still leave them with $316M in net profit.

The statement that if they did not receive regulatory credit revenues they would not have achieved a profitable quarter, is FALSE.

 

[braumeister]

I have to agree with others that it really is kind of fun baiting you guys, but OK, I'll stop it now.

 

[MichaelB]

Yes, those are Q3 numbers.

This statement from the article is likely false:

Revenue from the sale of regulatory credits made up $397 million. Without that revenue, Tesla would not have achieved a profitable quarter.


$397M in emission credit revenue out of $8.77B in revenues is only 4.5% of total revenues. Tesla had a gross profit margin of 23.5% in Q3. Are we to believe that if they missed this $397M in revenues they would have been unprofitable?

They showed a net profit of $331M on $8.77B in revenues for Q3. That is a net profit margin of 3.78%. Therefore, had they not received the $397M in emission credit revenues they would have missed out on $15M in net profit, which would still leave them with $316M in net profit.

The statement that if they did not receive regulatory credit revenues they would not have achieved a profitable quarter, is FALSE.

I have little interest in the Tesla threads, but this statement leads me to ask a question. If the $397M in credits do not have any associated costs they would fall straight through to the bottom line. If so, they do represent the entire reported profit, and a bit more. I’m sure someone can explain this.

 

[Qs Laptop]

I have little interest in the Tesla threads, but this statement leads me to ask a question. If the $397M in credits do not have any associated costs they would fall straight through to the bottom line. If so, they do represent the entire reported profit, and a bit more. I’m sure someone can explain this.

Regulatory Credits are counted as regular revenues and are included in the $8.77B in revenues. They do not "fall straight to the bottom line" as if they were a separate line on the income statement after all other expenses were subtracted. You can see this on page 11 and 12 of their SEC Form 10-Q filing:

https://www.sec.gov/Archives/edgar/...930.htm#Consolidated_Statements_of_Operations

 

[Popeye]

Regulatory Credits are counted as regular revenues and are included in the $8.77B in revenues. They do not "fall straight to the bottom line" as if they were a separate line on the income statement after all other expenses were subtracted. You can see this on page 11 and 12 of their SEC Form 10-Q filing:

https://www.sec.gov/Archives/edgar/...930.htm#Consolidated_Statements_of_Operations

The margin on the emissions credits is not 3.78%. What costs, if any, do they incur due to the credits? Accountants may play games with allocations and overheads but few costs go away if those credits go away.

 

[Qs Laptop]

The margin on the emissions credits is not 3.78%. What costs, if any, do they incur due to the credits? Accountants may play games with allocations and overheads but few costs go away if those credits go away.

No, the 3.78% is the net-net profit percentage, or the ratio of net earnings to revenues.

The point is that it is booked as part of regular revenues, it's not a separate special line item. As such, from an income statement standpoint it is subject to all the costs associated with any other type of revenue that is generated.

I suppose it is possible the regulatory revenues pushed earnings into the black but there is no way to definitively state that from published financial statements, therefore the writer of that article cannot state it as a fact.

I suspect the next quarter's numbers, due out on Jan 27th, will put to rest any question of Tesla's profitability.

 

[tulak]

EVs are displacing ICE vehicles as we speak and the pace will continue to grow. This thread asks about the "long-term" investment value. If the future is with EVs, then the long-term is looking good.

Sure, but not at any price. Even though it would have eventually worked out, I wouldn’t want to buy Amazon in 1999 at the height of the dot-com bubble.

 

[ERD50]

I have little interest in the Tesla threads, but this statement leads me to ask a question. If the $397M in credits do not have any associated costs they would fall straight through to the bottom line. If so, they do represent the entire reported profit, and a bit more. I’m sure someone can explain this.

I think you just did.

-ERD50

 

[oneill225]

Sure, but not at any price. Even though it would have eventually worked out, I wouldn’t want to buy Amazon in 1999 at the height of the dot-com bubble.

Fair enough. There will be a market correction one day, but trying to time the market can be even riskier in the long run. I pick good companies and sectors for investments. I have been wrong, but more often it has worked out (in the long run).

I will also say that sometimes what looks overpriced turns out to be underpriced in hindsight. It was true of Amazon, Microsoft, Netflix, Apple, etc... I think it is also true of Tesla for at least another year or two.

 

[Christine]

I think he means without counting the sales of emission credits. Is it profitable just on car sales yet?

Tesla pays taxes on the emission credits. If you want to calculate profit and subtract the credits then you must also subtract an amount from the taxes paid.

And then Tesla is still profitable. For a few quarters.

But the whole idea of subtracting emission credits is just silly. It's a perfectly valid income. From selling a product to other auto makers.

Sure - the market for emission credits exists because of regulations from governments. But that is also true for many other markets.

 

[ERD50]

Tesla pays taxes on the emission credits. If you want to calculate profit and subtract the credits then you must also subtract an amount from the taxes paid. ...

So did you do that? The info is all in the filing:

Income (loss) before income taxes 555

Automotive regulatory credits 397

So > 70% of that profit was from emission credits.

That said, I'll agree with others that if they are pouring money back in the business as an expense (as Amazon did), reported profits might not be all that important of a measure.

... But the whole idea of subtracting emission credits is just silly. ...

No, not silly at all. The title of this thread is "Tesla for the long run?". Those emission credits will phase out, so it certainly is a factor for future evaluations. It would be silly (or dangerous to your financial health if you are using it to guide investment decisions), to not consider where Tesla will be as the credits phase out.

-ERD50

 

[Christine]

No, not silly at all. The title of this thread is "Tesla for the long run?". Those emission credits will phase out, so it certainly is a factor for future evaluations. It would be silly (or dangerous to your financial health if you are using it to guide investment decisions), to not consider where Tesla will be as the credits phase out.

-ERD50

I agree with that. What is silly is declaring that emission credits isn't income. Or make it sound like it's cheating.

 

[MichaelB]

Regulatory Credits are counted as regular revenues and are included in the $8.77B in revenues. They do not "fall straight to the bottom line" as if they were a separate line on the income statement after all other expenses were subtracted. You can see this on page 11 and 12 of their SEC Form 10-Q filing:

https://www.sec.gov/Archives/edgar/...930.htm#Consolidated_Statements_of_Operations

The credits don’t “fall through to the bottom line”. Looking over the financial statement, it looks like they do “flow through to the bottom line”. My mistake earlier to not catch the wrong word.

Flow through to the bottom line means a revenue item that has no corresponding cost or expense, so the entire amount is profit. Such appears to be the case here. Add to that the foreign exchange translation adjustment of $165M and it looks to me like all of Tesla’s profit came from items that probably won’t be part of ongoing operations.

My comments above are not about Tesla valuation, on which I have no view. They are about reading a financial statement. A business in growth mode, investing heavily, won’t meet the same financial criteria as an established business, so many of the comparisons are not relevant. At some future point, though, cash flow will matter, and then some stock valuations will likely face a reckoning.

 

[OldShooter]

The credits don’t “fall through to the bottom line”. Looking over the financial statement, it looks like they do “flow through to the bottom line”. My mistake earlier to not catch the wrong word.

Flow through to the bottom line means a revenue item that has no corresponding cost or expense, so the entire amount is profit. Such appears to be the case here. Add to that the foreign exchange translation adjustment of $165M and it looks to me like all of Tesla’s profit came from items that probably won’t be part of ongoing operations.

My comments above are not about Tesla valuation, on which I have no view. They are about reading a financial statement. A business in growth mode, investing heavily, won’t meet the same financial criteria as an established business, so many of the comparisons are not relevant. At some future point, though, cash flow will matter, and then some stock valuations will likely face a reckoning.

Yes. Good. The other thing about P&Ls in this type of a situation is that they are subject to backward revisions. There are a lot of people inside Tesla invested in the stock and, while worrying about an Enron is unnecessary IMO, there are many opportunities to capitalize expense items, to book scrap components as repairable inventory, and to make other debatable tweeks. In other similar high-flyer situations this is a consideration. No reason to expect anything different here.

The major issue, as you imply, is reconciliation of stock prices with business results. Today we are looking at a company with world market share best measured in basis points. Everyone, including me, expects it to travel the standard technology s-curve We just have to wait to see what the asymptote turns out to be. Opinions vary.

 

[Qs Laptop]

Flow through to the bottom line means a revenue item that has no corresponding cost or expense, so the entire amount is profit. Such appears to be the case here.

I don't see how one can pick and choose which particular revenue contributed to the profit picture. I might as well say, "without Tesla's sales of solar roof panels the company wouldn't have shown a profit." Or, "without Tesla's energy storage and leasing program and automotive leasing programs they wouldn't have shown a profit".

It's easy to pick out the regulatory revenues as the item that pushed them over the top because of the (assumed) high profit margin, but it's just a component of overall revenue.

 

[OldShooter]

I don't see how one can pick and choose which particular revenue contributed to the profit picture. ...

Sorry, but that's how P&L analysis is done. One area of interest is always non-recurring revenue items or items that do not have a long-term effect. A favorable settlement on a patent infringement suit might, for example, be identified.

Often the picking and choosing is done on the expense side where a company claims some expense item to be special, then providing a "pro forma" P&L that pretends the event didn't happen.

I am not an FASB expert but I would be surprised if the reporting standards didn't require that this type of thing be identified separately in reports. If not, companies might be tempted to bury the revenue candy pops in the revenue line to make core revenue look healthier than it really was.

 

[Qs Laptop]

Sorry, but that's how P&L analysis is done. One area of interest is always non-recurring revenue items or items that do not have a long-term effect. A favorable settlement on a patent infringement suit might, for example, be identified.

The emissions credit revenues is an ongoing, regularly realized revenue. It is lumped into revenues and there is no special line item for it.

Therefore, it is incorrect to say that the regulatory revenues is "the only reason Tesla is profitable," just as it's incorrect to say, "without Tesla's energy storage and leasing program and automotive leasing programs they wouldn't have shown a profit".

 

[OldShooter]

The emissions credit revenues is an ongoing, regularly realized revenue. It is lumped into revenues and there is no special line item for it.

Therefore, it is incorrect to say that the regulatory revenues is "the only reason Tesla is profitable," just as it's incorrect to say, "without Tesla's energy storage and leasing program and automotive leasing programs they wouldn't have shown a profit".

As you like. You would not do well in a financial analysis class.

 

[MichaelB]

My final post here (hopefully). Hopefully everyone who wants to continue with the Tesla discussion can do so without snark and respecting each other’s views.

A financial analyst would want to look at the financial statements with and without items that are not core to the operations and make projections based on those items that are recurring and operational. The credits are external, controlled or granted by governments, and therefore difficult to project, as there’s no reason to expect them to continue.

The fact that the credit is in revenue and not OID is curious, but it would not be so without the concurrence of the auditors. This implies the credit is part of ongoing operations and not a one-off or unrelated event.

Most of a business market capitalization is the expectation of future cash flows, not current profits. It’s pretty clear this expectation is quite aggressive and ambitious in the case of Tesla. Current profitability is a minor component in the calculation.

 

[Qs Laptop]

As you like. You would not do well in a financial analysis class.

Hilarious.

I guess my 30 years real world experience as a small business owner creating my company's P&L statements and my 34 years as an investor analyzing them is just a goat fart in a windstorm.

 

[MRG]

Hilarious.

I guess my 30 years real world experience as a small business owner creating my company's P&L statements and my 34 years as an investor analyzing them is just a goat fart in a windstorm.

At the end of most of my education experiences was a final lesson. Now welcome to the real world. One of my instructors from programming class, assembly language, came to Megacorp as an assembly language developer.

I had fond memories of how he conducted class and how he could explain in detail all the possible outcomes and subsequent condition codes from say a MVCL instruction. Then the real world hit. It was sad to see.

 

[oneill225]

My final post here (hopefully). Hopefully everyone who wants to continue with the Tesla discussion can do so without snark and respecting each other’s views.

A financial analyst would want to look at the financial statements with and without items that are not core to the operations and make projections based on those items that are recurring and operational. The credits are external, controlled or granted by governments, and therefore difficult to project, as there’s no reason to expect them to continue.

The fact that the credit is in revenue and not OID is curious, but it would not be so without the concurrence of the auditors. This implies the credit is part of ongoing operations and not a one-off or unrelated event.

Most of a business market capitalization is the expectation of future cash flows, not current profits. It’s pretty clear this expectation is quite aggressive and ambitious in the case of Tesla. Current profitability is a minor component in the calculation.

The focus on credits is interesting, but it should be noted that Tesla will produce twice as many cars this year as last and that they will have two new large plants producing cars before the end of this year (meaning that production capacity in 2022 could double again). My point is that a few hundred million in credits will not be the make or break issue that some are suggesting.

Also, my understanding of the credits is that they do not come from the government; they are negotiated contracts between Tesla and other non-compliant manufacturers. The 2020 credits that are being discussed are actually from a three year agreement with Fiat. So, Tesla will also receive them in 2021 in addition to any other credits that they negotiate. Honda recently agreed to pool their credits with Tesla, as well (in other words, Honda will also pay Tesla in 2021).

As I have said before, the credits are not some canary in the coal mine signaling Tesla's struggle to make a profit. I view it as an incredibly beneficial situation (for Tesla) that, essentially, has other auto makers paying for a big chunk of Tesla's growth and dominance in the EV market. Does anyone here, honestly, believe that a few hundred million will make or break Tesla in 2022?

 

[Popeye]

Hilarious.

I guess my 30 years real world experience as a small business owner creating my company's P&L statements and my 34 years as an investor analyzing them is just a goat fart in a windstorm.

Even though it isn’t reported publicly, you can be sure that the finance people at Tesla know the margins on every individual product line, model, and option they sell. There’s no way they could accurately forecast anything without this knowledge. They no doubt consider it company confidential data so it is not disclosed, but they are well aware of it.

 

[38Chevy454]

The focus on credits is interesting, but it should be noted that Tesla will produce twice as many cars this year as last and that they will have two new large plants producing cars before the end of this year (meaning that production capacity in 2022 could double again). My point is that a few hundred million in credits will not be the make or break issue that some are suggesting.

Also, my understanding of the credits is that they do not come from the government; they are negotiated contracts between Tesla and other non-compliant manufacturers. The 2020 credits that are being discussed are actually from a three year agreement with Fiat. So, Tesla will also receive them in 2021 in addition to any other credits that they negotiate. Honda recently agreed to pool their credits with Tesla, as well (in other words, Honda will also pay Tesla in 2021).

As I have said before, the credits are not some canary in the coal mine signaling Tesla's struggle to make a profit. I view it as an incredibly beneficial situation (for Tesla) that, essentially, has other auto makers paying for a big chunk of Tesla's growth and dominance in the EV market. Does anyone here, honestly, believe that a few hundred million will make or break Tesla in 2022?

They *DO* come from the gov't. The credits are nothing without the gov't declaring them to be something, due to gov't regulation. That something has value in selling the something for money to another manufacturer. But in no way did Tesla do anything except be a recipient of their proportioned credits from the gov't. How they use those credits is a business decision.


I will agree that a few hundred million is nice free money, but it also is not going to in itself decide whether Tesla survives to 2022.