Elon Musk has been a frequent source of my columns, but Tesla's (TSLA) third quarter results were free of the drama that has accompanied other calls - Zoom (ZM) and otherwise - in the past week. The bottom line on Tesla is that the company booked $397 million in revenue from selling zero-emission vehicle credits to other automakers in 3Q 2020 (which come without accompanying costs) and showed "net income used in computing net income per share of common stock" of $300 million. More than 100% of Tesla's net profits came from selling credits in the quarter.
Of, course, those are figures calculated according to generally accepted accounting principles. And that's where we need to stop. As a former institutional securities analyst, I would love to heap scorn on individual investors, but the questions Tesla answered on its conference call (submitted via the app Say) showed no difference in quality in the retail and institutional categories. If you think a company can just disgorge itself - Tesla's share count rose 20% y-o-y in the quarter - and not have to run that through the P&L, you and I will never agree.
Tesla's current analysts make me glad to have learned my craft in the days of real automotive analysts like my mentor Wendy Needham, Datatrek's Nick Colas, Guggenheim's John Casesa and, yes, even Steve Girsky, now Chairman of Nikola (NKLA) . So, what those great financial statement sleuths would have been looking for in the case of Tesla is incrementality.
Tesla's unit deliveries rose 43% y-o-y in the third quarter to 139,593. We already knew that. Tesla's 3Q slideshow is chock full of images of plants either completed (Fremont, Lingang) or being built (Brandenburg, Austin) and, let me tell you, those things cost money. Lots of it. The problem in analyzing Tesla's numbers, and it is very difficult to do so until the 10-Q is released, is attempting to find the incrementality.
Tesla's revenue recognized from ZEV credit sales rose 200% in the quarter. Tesla's clean automotive revenues (I adjust for leasing revenues and subtract credit sales) rose only 39% on the 43% gain in unit deliveries. Okay, that's fine. They are selling cheaper versions of the Model 3 in China, but they will make that up on incrementality and lower labor costs there. That's what some analysts - Tesla listed seven banks on its most recent "ATM" share offering - would have you believe. In the third quarter anyway, that didn't happen.
Tesla's incremental margin in its car business was 30% in the quarter. As that figure includes recognition of revenues related to FSD, we can assume that it was flattered. Every time Musk tweets about FSD it gives Tesla's accounting department ammunition to recognize a greater proportion of the money that consumers have paid for Tesla's nonexistent FSD systems. So that's free revenue and margin, even though Tesla is light years behind Alphabet's (GOOGL) Waymo and GMs (GM) Cruise in autonomous technology, as recent releases from those two players have shown. Tesla's making something in the mid-20%'s on a gross profit basis on each incremental car sold. That's okay, not great. C+.
China has NOT been transformational for Tesla's automotive profitability and the company's recent price cuts there (even mentioned in the 3Q earnings slides) ensure that it never will be. As Tesla adds a third shift at Lingang, the key is to keep that plant running full-out and that's where the story goes off the rails.
Tesla has had the premium EV market virtually to itself for the 3.5 years since it introduced the Model 3, and should be printing profits. It's not. Again, on a corporate basis, all net profits have come from ZEV credit sales. As more auto OEMs ramp up EV offerings, those credit revenues will dwindle, but unlike the numbers-blind quasi-futurists who "follow" Tesla stock, I don't have to look into a crystal ball to see the ZEV future.
Volkswagen (VLKAF) is absolutely dominating Tesla in Europe's "green-friendly" markets. Tesla has registered 65 Model 3s in Norway thus far in October, VW has registered 1,931 units of its recently-launched ID.3 ZEV. That hatchback model's cousin, the ID..4 electric SUV, will be launched soon in China - published reports indicate November 3rd - and in the U.S. as published reports indicate the first U.S.-bound ID.4s will land before Christmas.
On a competitive basis, things are getting worse for Tesla. They are about to get much worse in its two largest markets, China and the U.S. I followed VW for years on the sell-side, and I know their dominance in China and Europe (#1 in both markets) is nothing to be trifled with. As with any consumer product, more competition equals more margin pressure. It's getting real out there in EV-land. Tesla can't make a real, GAAP profit even now when it has the premium EV market largely to itself. That is about to change. The wheel turns. Car companies adapt. Sell-side analysts rarely do.