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Here’s Why You Shouldn’t Get Excited About Tesla’s Quarterly Profit

Last Updated September 23, 2020 2:08 PM
Mark Emem
Last Updated September 23, 2020 2:08 PM
  • Tesla made history by posting a profit for the fourth consecutive quarter.
  • Regulatory credit revenues rose as sales from the core business fell.
  • The stock continues to defy gravity.

Tesla (NASDAQ:TSLA) may finally join the S&P 500 Index courtesy of the latest quarterly results.

On Wednesday, the electric vehicle (EV) maker posted a net income of $104 million  for the second quarter. This marked the fourth consecutive quarterly profit, a first in Tesla’s history.

For a company that has been written off numerous times, it is a notable accomplishment. To the discerning eye, the results should raise more concerns than excitement.

Here’s why.

1. Reliance on an unsustainable profit driver

Tesla is increasingly dependent on selling emissions credits  to other automakers to make a profit.

During the second quarter, Tesla sold regulatory credits worth $428 million and made a profit of $104 million. In the first quarter, the company sold emissions credits worth $354 million and returned a profit of $16 million. That’s 21% growth quarter-on-quarter.

In Q2 2019, Tesla sold regulatory credits worth $111 million. That represented an annual growth rate of 286%.

Tesla, tsla
Tesla’s revenues from regulatory credits have grown by triple digits year-over-year. | Source: Tesla Website 

Even as revenues fell, the sale of regulatory credits was Tesla’s lifesaver. As the EV maker sells more cars, this revenue source is going to increase. But it is unsustainable in the long run as rival automakers ramp up their efforts in the EV space.

2. Tesla is mortgaging the future to satisfy the present

At a time when competition in the EV space is growing, Tesla is reducing the one investment that gives it a technological edge. Compared to a similar quarter a year ago, Tesla cut research and development spending by 14%.

Tesla’s R&D spending reached its peak in 2018 and has been falling ever since. In 2019, the EV maker’s R&D expenses dropped by 8%. During the first six months of this year, R&D expenses have fallen by nearly 10% annually.

Elon Musk
Tesla has been lowering its R&D spending for the last six quarters. | Source: @PhenomenalPoto/Twitter 

Tesla’s declining R&D contrasts sharply with legacy automakers, which are increasing their research spending. For instance, Volkswagen raised its spending on electric and autonomous vehicle technologies 36% last year.

In its Q2 earnings report , Tesla said reduced operating costs contributed to profitability. Unfortunately, parts of the cuts came from a department that needs more funds to weather the growing competition.

3. Tesla car prices going downhill

While releasing the Q2 results, Tesla noted:

The positive impact of higher vehicle deliveries, higher regulatory credit revenue and higher energy generation and storage revenue was somewhat offset by lower vehicle average selling price (ASP) and lower services and other revenue.

As competitive pressures increase, Tesla can expect to record lower margins from every vehicle sold due to price reductions. Unless production and input costs reduce dramatically, the EV maker will continue to rely on revenues from a non-core business to generate profits.

Reality-defying stock valuation

Tesla’s measly quarterly profit now brings the firm one step closer to joining the S&P 500 Index. On the flip side, it also exposes how overpriced TSLA is compared to the world’s 20 largest companies by market cap. Tesla is now a member of this elite group.

TSLA’s P/E ratio exceeds Amazon’s, a company Tesla bulls continuously compare it to, by over three times. | Source: @maybebullish/Twitter 

For the top-20 companies, the median price-to-earnings ratio is 30. The EV maker’s P/E ratio, on the other hand, is more than 300.

Tesla’s latest quarterly profit is nothing to cheer about.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.