Could Tesla Be Profitable Without Regulatory Credits?

Rob Maurer

In Tesla's second quarter earnings report last month the company reported a GAAP net income of $104M bringing the trailing-twelve-month period to GAAP profitable for the first time in Tesla's history.

Critics, however, have argued that Tesla was only able to achieve profitability due to regulatory credit sales to other automakers which may not continue in the future. Over the same 12-month period, Tesla sold $1.05B in regulatory credits, all of which flowed through to the bottom line. Excluding these credit sales takes Tesla's 12-month GAAP net income from $368M of profit down to $681M of loss. So is Tesla actually losing money on their core business once regulatory credit sales are excluded? It's not quite that simple.

First, stock-based compensation (SBC) should be considered. SBC is stock granted to employees of the company which vests over time. The company creates new shares to issue to employees as a part of SBC, so while it adds dilution, it is not a cash cost. Over the last 12 months, Tesla's SBC totaled a little over $1B. This is important to account for, hence the inclusion in the GAAP net income metric, but because it is not a cash cost it does not impact whether or not Tesla is "making money".

Tesla and many other companies report non-GAAP financials which exclude stock-based compensation so investors can better understand the income statement. Tesla's non-GAAP net income over the trailing-twelve-months was $1.4B. Excluding regulatory credits, Tesla's non-GAAP net income was $357M.

Furthermore, when discussing profitability, it is important to consider how Tesla has chosen to structure their business model. Tesla has leveraged debt to enable faster growth without diluting shareholders. That debt currently sits at about $8.5B. Each quarter, Tesla pays interest on that debt. For the last 12 months, that interest expense has totaled $694M.

If Tesla had chosen to grow more slowly, stockpile less cash (currently at $8.6B), or raised more capital via equity rather than debt, Tesla could have entirely eliminated those interest expenses and posted much stronger net income results. Excluding interest expenses, GAAP net income over the last 12 months was $1.06B and non-GAAP net income was $2.10B. If regulatory credits are again excluded, GAAP net income was a positive $13M while non-GAAP net income was $1.05B. 

This provides an example of the impacts high growth can have on short-term profitability. Tesla could easily show strong GAAP profit numbers even excluding regulatory credit sales, but it would be detrimental to the business overall.

With Tesla's current $412B market cap, the company could raise capital and erase the $8.5B of debt with just 2% dilution, significantly improving their quarterly net income in the coming quarters. However, with access to low-cost debt, the short-term interest expenses may be preferable to shareholders who expect Tesla's future income to grow significantly.

No matter the decision, it should be clear that it is within Tesla's power to show profitability even without the benefit of regulatory credit sales.

For more analysis on Tesla, see the included video and follow Tesla Daily on TheStreet.

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Disclosure: Rob Maurer is long TSLA stock and derivatives.