Sinlung /
27 April 2021

TSLA Slides After Beating EPS, But All "Net Income" Comes From Sale Of Reg Credits And Bitcoin

TSLA made $100MM in 1 month of trading crypto, more than it ever made selling cars in 14 years (ex reg credits). It should shut all money losing ventures and become a full time trading desk.

 Wall Street expectations from TSLA's earnings today are rather stratospheric, but as Bloomberg notes, even if the company misses big, the S&P 500 likely won’t be in the doldrums tomorrow because of it. Why? Simply put, the electric-vehicle maker matters less than other high-profile stocks in the broad market gauge.

Alphabet,, Apple, Microsoft and Tesla are among the most influential companies in the stock market. But by one simple measure, Tesla looks different than the others. The S&P 500’s 30-day positive correlation with the stock has fallen to ~0.44 from an early March peak of almost 0.8. That pales in comparison with Microsoft at ~0.77, Apple at ~0.72, Amazon at ~0.68 and Alphabet at ~0.65. In fact, the S&P 500’s correlation with old-school cyclical Caterpillar -- which also reports this week -- is higher than Tesla at ~0.51. This falling correlation is inevitable as Tesla has gained less than 5% this year compared with over 11% for the S&P 500, with value sectors such as energy and financials outperforming. This has happened as meme stocks like GameStop have pushed Tesla out of the limelight, while Bitcoin has attracted almost all the buzz.

With that in mind, here is what TSLA reported shortly after the close for Q1:

  • Adjusted EPS of 93C, beating est. 80c
  • Revenue $10.389BN, missing est. $10.42 billion (range $8.20 billion to $12.34 billion)
  • Free Cash Flow $293MM, beating est. of cash burn of $82.8 million
  • Automotive gross margin +26.5%, beating est +24.3%
  • Cash and cash equivalents $17.14 billion, missing estimates of $17.90 billion

The results visually:

But here is the problem: TSLA reported $594MM in income from operations, but regulatory credits accounted for a whopping $518MM of it, the highest on record and up from $401MM in Q4 2020.

So while GAAP net income was just $438MM, this means that for yet another quarter the company did not generate actual net income without regulatory credits. Add that another $101MM in profits came from "sale of bitcoin"...

... with TSLA owning $1.3BN in digital assets at the end of the quarter, which means it sold around $272MM of the bitcoin it previously owned.

So in addition to over half a billion in reg credit sales, made $101MM in profits from sale of $272MM in bitcoin (reducing its total from $1.5BN to $1.331BN at the end of the quarter).

And while everyone assumes that this is all bitcoin, it is unclear how much of TSLA's "digital assets, net" was Dogecoin.

Of course, some will claim that non of this matters, and that TSLA has in fact generated 7 consecutive quarters of profits, although if one strips reg credits from the GAAP Net Income, this is what one gets.

Discussing its profitability, TSLA said that its operating income improved in Q1 compared to the same period last year to $594M, resulting in a 5.7% operating margin. "This profit level was reached while incurring SBC expense attributable to the 2018 CEO award of $299M in Q1, driven by an increase in market capitalization and a new operational milestone becoming probable."

On a year over year basis, Tesla said that positive impacts from volume growth, regulatory credit revenue growth, gross margin improvement driven by further produt cost reducstions and sale of bitcoin were mainly offset by a lower ASP, increased SBC, additional supply chain costs, R&D investments and other items. Model S and Model X changeover costs negatively impacted both gross profit as well as R&D expenses.

In  terms of Tesla’s financial performance, it’s a case of better-than-expected Automotive Margins and free-cash-flow. The company said of its profit outlook: "We expect our operating margin will continue to grow over time, continuing to reach industry-leading levels with capacity expansion and localization plans underway."

The company also disclosed that it is on track to start production from Berlin factory in 2021, adding that first deliveries of the new model S should start shortly.

On the cash flow side, TSLA revealed that it had a $1.2BN net cash outflow related to bitcoin in Q1, as well as net debt repayments of $1.2BN offset by free cash flow of $293MM, which was above the estimate of $83MM in cash burn:

Quarter-end cash and cash equivalents decreased to $17.1B in Q1, driven mainly by a net cash outflow of $1.2B in cryptocurrency (Bitcoin) purchases, net debt and finance lease repayments of $1.2B, partially offset by free cash flow of $293M

Looking ahead, Tesla said it expects to achieve 50% average annual growth in vehicle deliveries over a multi-year horizon. But the company notes that rate of growth will depend on equipment capacity, operational efficiency and capacity and stability of supply chain.

Tesla’s timeline also remains largely intact. From the shareholder letter:

“We are currently building Model Y capacity at Gigafactory Berlin and Gigafactory Texas and remain on track to start production and deliveries from each location in 2021. Gigafactory Shanghai will continue to expand further over time. Tesla Semi deliveries will also begin in 2021.”

Something else the market may not like is that the average selling point for a Tesla fell 13% in the first quarter. According to the company, this is "because Model S and Model X deliveries reduced in Q1 due to the product updates and as lower ASP China-made vehicles became a larger percentage of our mix."

Elsewhere, there was no substantive mention of Cybertruck anywhere in the shareholder presentation, just that it’s a product ‘in development’ listed under the Texas plant. As Bloomberg reminds us, "Musk has said on prior calls that small volumes of Cybertruck deliveries could be possible by the end of this year. Will he give an update on that during the earnings call?"

Not surprisingly, not even TSLA's usual cheerleaders were ecstatic about the results: “Everything happened that people thought would happen,” Munster told Bloomberg. “There’s not a lot of news and it wasn’t a blowout.”

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In kneejerk response to the earnings, Tesla shares were first up, but then slide more than 1% in postmarket, which nonetheless was a much tamer reaction than what options trading was pricing in ahead of the results.


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