- Wall Street analysts complained that Tesla failed to acknowledge about $US200 million in non-ZEV credit sales for its first-quarter earnings, tucking the info away in a 10-Q filing with the Securities and Exchange Commission instead.
- Tesla has been dinged for selling ZEV and non-ZEV credits before – despite its ability to freely generate them in the natural course of business.
- The complaints demonstrate a worrying trend of analysts ignoring the realities of Tesla’s business.
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Tesla has a business problem. Specifically, nobody who follows the company seems even remotely interested in figuring out which industry the carmaker is actually in.
The problem predictably resurfaced this week when, in its 10-Q filing with the Securities and Exchange Commission (SEC) following underwhelming first-quarter earnings, Tesla reported that in addition to a relatively modest $US15 million in zero-emission-credit (ZEV) sales, the company also sold about $US200 million in non-ZEV credits.
“Tesla Analyst Miffed by Credit Sales Missing From Musk’s Call,” read the Bloomberg headline atop a story that pointed out how Tesla had failed to note the non-ZEV credits, which might have originated through a deal with Fiat Chrysler Automobiles to mitigate the latter’s emissions penalties in Europe, according to Toni Sacconaghi of Bernstein.
It’s fair to point out that Tesla and CEO Elon Musk didn’t say anything about the additional credits when the company reported earnings. The sale did knock a nearly $US1 billion loss down to a mere $US700 million. It’s unfair to attribute some nefarious motive to the sale, however.
As I’ve argued before, Tesla can sell emission credits, ZEV or non-ZEV, whenever it wants. In fact, Musk has rightly maintained that Tesla gets a raw deal on credit sales because it can’t always move them for their full price: The existing credit regime in California, for example, discounts ZEV credits for Tesla because of buyers being able to control their own demand.
Emission credits are an integral part of Tesla’s business
That aside, emission credits are baked into Tesla’s business. It’s the only automaker on the planet that produces electric vehicles and nothing else, so it consequently racks up a huge number of credits. Naysayers label this a subsidy, but of course it pales in comparison to the titanic handout traditional car companies get from the US government, which hasn’t raised the gas tax since the 1990s.
There’s no good reason for Tesla to hoard credits, but every time it sells any or does a deal along the lines of the one it reportedly struck with Fiat Chrysler Automobiles, it gets clobbered. Simply for doing business as an all-electric automaker.
Musk has been playing nice with Wall Street since last year’s infamous flip-out, but the reality is that Tesla doesn’t much care for the public markets (Musk’s failed take-private scheme from 2018 wasn’t exactly surprising – he’d been grousing about excessive Wall Street scrutiny for some time). Musk’s dislike for banks is intensified by his robust appetite for capital. He’ll probably have to go hat in hand to the financiers again this year to raise money, either through issuing equity or through another round of junk-bond issuance.
Wall Street, for its part, is going through another one of its troubling epiphanies about Tesla’s business, which it does what it can to ignore. Disregard the silliness pumped out by Ark Invest (Tesla goes to $US4,000 a share!) and focus on the investment banks. Sell-side analysts certainly grasp that even as Tesla grows its market, the case for a $US40 billion market capitalisation is very, very weak.
The latest reality check for Wall Street
As the fundamental grind of building and selling vehicles has become Tesla’s daily struggle – its poor first-quarter results were largely because of logistics challenges in shipping cars to Europe and Asia – Wall Street has pulled back on ambitious price targets and soured on Tesla’s disruptive capabilities. Some of these analysts are auto experts, and they know where the story leads: General Motors and Ford have posted so many profitable quarters since the financial crisis that the margins have gotten routine, and yet share prices go nowhere.
That’s probably Tesla’s destiny: to be a middle-of-the-pack, but still quite successful, purveyor of electric transportation. Over time, emission-credit revenue could become for Tesla what captive auto lending is for a major automaker: a sustainably lucrative cash generator.
And that’s why Wall Street (and everybody else) should get over Tesla’s tactics when it comes to selling emission credits. It’s revenue, for crying out loud! Tesla needs the cash. What’s to be gained in dinging the company for what it can and should do?
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