(CNN) -
Tesla posted its first full year of net revenue in 2020, but not because of sales to its customers.
Eleven states require automakers to sell a certain percentage of zero-emission vehicles by 2025. If they can't, automakers have to buy regulatory credits from another automaker that meets those requirements, like Tesla, which sells exclusively electric cars.
It's a lucrative business for Tesla, generating $ 3.3 billion over the course of the past five years, almost half of that in 2020 alone. The $ 1.6 billion in regulatory credits it received last year far exceeded net income. of $ 721 million, meaning that Tesla would have posted a net loss in 2020.
These guys are losing money selling cars.
They are making money selling credits.
And the credits are disappearing, ”said Gordon Johnson of GLJ Research and one of the biggest bears on Tesla stocks.
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Senior Tesla executives admit that the company cannot count on that cash source to continue.
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"This is always an area that is extremely difficult for us to forecast," said Tesla CFO Zachary Kirkhorn.
“In the long term, regulatory credit sales will not be a material part of the business, and we do not plan the business around that.
For a handful of additional quarters, it may remain strong.
It is also possible that it is not.
The 11 states that will require a certain percentage of cars to be zero-emission vehicles, or for automakers to buy credits from a company like Tesla that has exceeded the target, are California, Colorado, Connecticut, Maine, Maryland, Massachusetts, New York, New Jersey, Oregon, Rhode Island and Vermont.
Tesla reports other profitability measures as well, as do many other companies.
And with those measures, the profits are large enough that they are not dependent on credit sales to be in the black.
The company reported adjusted net income in 2020, excluding items such as share-based compensation of $ 1.7 billion, of $ 2.5 billion.
Its gross automotive profit, which compares the total revenue from its auto business to the expenses directly associated with building the cars, was $ 5.4 billion, even excluding revenue from regulatory loan sales.
And its $ 2.8 billion free cash flow was up 158% from the previous year, a sea change from 2018, when Tesla was consuming cash and in danger of running out of money.
His supporters say those measures show that Tesla is finally making money after years of losses on most of those measures.
That profitability is one of the reasons stocks performed so well for more than a year.
But the debate among skeptics and devotees of the company over whether Tesla is truly profitable has turned into a "Holy War," according to Gene Munster, managing partner at Loup Ventures and a leading technology analyst.
They are debating two different things.
They will never reach a resolution, ”he commented.
Munster believes that critics focus too much on how credits still exceed net income.
He argues that the automotive gross profit margin, excluding regulatory loan sales, is the best barometer for the company's financial success.
"It's a leading indicator" of that measure of Tesla's earnings, he said.
"There is no possibility that GM and VW are making money on that basis with their electric vehicles."
The future of Tesla
The high performance of Tesla shares, an increase of 743% in 2020, makes it one of the most valuable American companies in the world.
However, the 500,000 cars it sold in 2020 were a small part of the more than 70 million vehicles estimated to have been sold worldwide.
Tesla's stock is now worth roughly as much as those of the 12 largest automakers combined that sell more than 90% of cars globally.
What Tesla has that other automakers don't have is rapid growth: Last week it forecast annual sales growth of 50% over the next several years, and expects to do even better than that in 2021 as other automakers They are struggling to return to pre-pandemic sales levels.
The entire industry is moving toward an all-electric future, both to meet the world's strictest environmental regulations and to satisfy the growing appetite for electric vehicles, in part because they require less labor, fewer parts, and cost less to run. build than traditional gasoline cars.
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"One thing most people can agree on is that electric vehicles are the future," Munster said.
"I think that is a safe assumption."
While Tesla is the leading electric car maker, it faces increased competition as virtually all automakers launch their own electric vehicles, or plan to do so.
Volkswagen has surpassed Tesla in terms of electric vehicle sales in most of Europe.
GM said last week that it hopes to completely switch to emission-free cars by 2035.
"The competition is making Tesla cars irrelevant," said Johnson of GLJ Resarch.
"We don't see this as a sustainable business model."
Other analysts argue that Tesla's share price is justified given that it can benefit from the switch to electric vehicles.
"They will not hold an 80-90% share of the EV market, but they can continue to grow even with a much smaller market share," said Daniel Ives, technology analyst at Wedbush Securities.
“We are looking north from 3 million to 4 million vehicles annually as we move into 2025-26, with 40% of that growth coming from China.
We believe that they are now on the path that even without the credits it will continue to be profitable.
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