Tesla [TSLA] FUD: Regulatory Credits
Published on February 3rd, 2021 | by Frugal Moogal
February 3rd, 2021 by Frugal Moogal
When I started writing for CleanTechnica, a big part of my goal was to examine the articles that seemed to spread FUD — fear, uncertainty, and doubt — about Tesla to determine when there was something to the underlying message and when I felt the data was being misinterpreted. At the time, I had started to invest in Tesla with what was at the time a very small amount, and I felt that it could be a really risky bet, but one that could pay off.
I was surprised to find out that nearly all of my FUD deep dives resulted in articles where I was not just completely unconcerned about the results, but where my digging gave me what I felt like was a real reason to be bullish on Tesla as a company. Some, like my warranty accounting series, took me from a position of really believing that the data would bear out some of the concern, to the point where I found out that Tesla does have a warranty accounting problem — it seems to have way more money in its warranty reserves then what it needs — the opposite of what all these analysts were claiming.
And, again as an aside, I think this led to great distrust in financial analysts and the financial media. I talked about this earlier this week with an article on the ongoing GameStop saga — I feel like the pump was primed by distrust of the financial media because of how easy it was to disprove much of the negativity surrounding Tesla, and digging in, it seemed clear that many were rooting for Tesla to fail just so they could turn a profit on it. It sure feels to me still like groups were actively trying to manipulate Tesla’s stock price to their own advantage with some of these claims. But anyway, I digress …
Through writing this series, as I became more confident in my research, the stock price went on … let’s just say, quite the run. This has resulted in almost an inverse of results in FUD-related articles — the bearish analysts have been racing to join the herd and describe what they missed in Tesla, and why it’s completely reasonable that they did. No one wants to admit that they were the ones out there pushing bogus warranty data, or “broken growth” stories, or whatever else that a whole bevy of retail investors (including a guy represented by a literal puppet) figured out before then.
Due to all of this, I haven’t been writing many FUD stories lately, but this week there seems to have been a massive increase in FUD stories again, now that earnings is over, and it centers around one of the same issues that the FUDsters have been claiming for ages — that Tesla doesn’t earn any money itself, it all comes from tax credits.
So, let’s dive into this!
Did Tesla Make Money Due To Regulatory Credits?
Well, sort of.
These recent articles, which have gone by super-FUDdy titles like “TESLA HAS A DIRTY SECRET!” — which sounds like another stupid hit piece about the “long tailpipe” or whatever — have claimed that over the past five years Tesla has received $3.3 billion in regulatory credits, with nearly half of that ($1.6 billion) coming in 2020 alone. (By the way, before going on, as per my usual policy, I don’t link to what I feel like is bad journalism.)
In this case, the article writers are correct — Tesla has received that much money in regulatory credits, and coupled with the fact that Tesla made $721 million in profit last year, if everything was the exact same, without these regulatory credits, Tesla would have posted a loss for the year.
But this is where the whole thing very quickly becomes an exercise in pointlessness. The regulatory credits that Tesla is getting money from are largely paid by other companies that have not sold enough low- or no-emissions vehicles to receive the credits. Those companies can make the choice of either paying a fine or purchasing some of Tesla’s regulatory credits. They have chosen to purchase the credits from Tesla for $3.3 billion over the last five years, including $1.6 billion last year.
And it’s actually a good setup for everyone, sort of. I mean, a lot of these automakers would rather have no regulation at all, so that they could build whatever giant gas-guzzling thing they want and not pay Tesla at all, but the regulatory credit system was set up to nudge automakers toward making new, compelling, low- or no-emissions cars. It isn’t Tesla’s fault that the non-Tesla options, with rare exceptions, haven’t been very compelling. The companies buying regulatory credits have then decided purchasing Tesla’s regulatory credits is the best option compared to either trying to make compelling low- or no-emissions vehicles, dropping the price of their own low- or no-emissions vehicles so low that people actually buy them, or paying the government.
It is a good deal for Tesla? Absolutely, since Tesla is never going to have a reason to need to use these credits to offset its non-existent internal combustion lineups.
Of course, this won’t go on forever, and it’s been clear in comments that Tesla isn’t planning for it to do so. But, for a company expanding at a 50% clip each year, adding tons of high-speed charging stations along the way, investing in service centers, building two factories from the ground up, greatly expanding another factory, and adding tons of its own battery production capacity, the bigger question is … why wouldn’t they take the money?
This Sort of Thing is Common
The other thing I feel that people need to understand is this sort of thing is extremely common in the markets we operate in. If you’re unsure if these are fair or not, it’s worth taking a step back and realizing that this is the exact sort of carrot and stick setup that governments use all the time to get results that they want. In this case, various governments in the world wanted to make the air cleaner, and so they created a regulatory plan to get the entire market to the point they wanted, and would reward those that did better by allowing them to sell their credits to other companies.
This is no different than tax breaks or incentives governments may opt to pass to encourage certain types of industry, job creation, or whatever.
Here’s one firsthand example I have — I live in a state that charges sales tax. (If you live somewhere that doesn’t, the quick explanation is that, for any purchase you make, a percentage is added to the cost to be given to the state.) The state has carveouts for certain things which it wants to encourage, and there is no sales tax for those things. I have worked with a company in that exact situation: the state has decided the main function of that company is tax exempt. This particular business operates with high volume, but very low margins. If it was forced to build sales tax into the price of its product, and nothing else changed (meaning it did not increase prices to make up for this), the company would lose money every year. Its current business plan includes this tax break as part of its annual profits.
And why shouldn’t it? Starting that business would have been riskier without the sales tax exemption. It wasn’t a surprise that the sales tax exemption was there, and it wasn’t like it’s only available for this company. It’s public knowledge, and any business could decide to use it if they so chose.
Maybe you don’t agree with the tax break. For instance, a lot of our tax breaks for fracking I definitely don’t agree with. But that doesn’t mean those businesses can opt not to go for the tax break and still compete. If you’re the one business that decided the tax break isn’t for you, especially in a commodity market, you’re going to be at a disadvantage.
That’s where this argument is so disingenuous in these articles. It seems they are trying to claim that Tesla should play by a different set of rules and claim they are losing money. This is as stupid as it gets, and makes me wonder if they understand much about business at all.
And one other point — let’s say something changes, and the business I was talking about with sales tax above suddenly didn’t have that sales tax exemption. At that point, the business would immediately change its business plan to charge more, would find some way to save some, or would opt to leave the market. It might be the company would lose money for a year or two, but after continual investment, a return to profitability would be expected, making that investment worth it.
This is exactly where Tesla finds itself. For now, the regulatory credit situation allows Tesla to do things cheaper or expand faster in ways it otherwise may not be able to. When the regulatory credit situation goes away, the business will pivot to operate in the new normal.
Tesla is doing nothing nefarious here. Was it able to claim a profit last year in part because of huge amounts of regulatory credit sales? Yes! Is this a sign the underlying business is bad? No! Do I expect these credits to go away? Yes, and so does Tesla, as they directly said on the call.
In 2020, legacy auto companies put $1.6 billion on the table and asked Tesla to take it for something that would otherwise be useless to Tesla. If Tesla did not take the money, and did not bend their business to operate around that infusion of cash, I’d have a heck of a lot more questions than I do now.
*Disclaimer: I am a Tesla [NASDAQ:TSLA] shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article is published in which I discuss matters that I feel may materially affect stock price. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.
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