Financial Performance

Tesla’s Emission Credits Fuel $104 Million Profit

“Tesla’s business model is currently 100% predicated on selling one-time temporary credits to guys who increasingly don’t need them."
Matthew HellerJuly 23, 2020

Tesla delivered a fourth straight quarter of profitability as reduced operating expenses and an increase in regulatory credit revenue helped offset a decline in sales due to the coronavirus pandemic.

Tesla’s second-quarter net income of $104 million came despite what CEO Elon Musk called “tremendous difficulties,” including the temporary shutdown of the automaker’s main plant in Fremont, Calif., after local officials issued a stay-home order.

Excluding items, Tesla earned $2.18 per share, crushing analysts’ estimates that were around the break-even line.

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Revenue fell 5% to $6.04 billion year over year as total sales of automobiles declined 5% to about 91,000 cars. But automotive gross profit margins were about 25%, or 17% excluding credits Tesla earns as a zero-emission vehicle producer.

“The second-quarter results are more fodder for investors convinced electric cars are the future and that Tesla will maintain its competitive lead in the category,” Barron’s said.

On news of the earnings, Tesla shares rose 4.1% in after-hours trading Wednesday. Year to date, the stock is up about 280%, well above comparable returns of the Dow and S&P 500 as well as Tesla’s automotive peers.

As The New York Times reports, some analysts were expecting Tesla to “lose money as the coronavirus pandemic squeezed the company” by forcing consumers to cut back on spending and Tesla to halt production in Fremont.

Without the $428 million in sales of emission credits, Tesla would have lost $324 million, the Los Angeles Times noted. For all of 2019, it sold $594 million worth of pollution credits.

“Tesla’s business model is currently 100% predicated on selling one-time temporary credits to guys who increasingly don’t need them,” Gordon Johnson of GLJ Research said.

But Tesla also cut operating expenses by 14% to $940 million by, among other things, cutting the pay of salaried employees by 10% to 30% in mid-April.

“The direct cost impact of the temporary shutdown was largely offset by these cost savings actions,” CFO Zachary Kirkhorn told analysts in an earnings call, adding that Tesla has also reduced production costs for the Model Y in Fremont and Model 3 in Shanghai.

(Photo by Noam Galai/Getty Images)