Tesla's Potential $1.8 Billion Profit Loss

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【Summary】Tesla's stock has dropped nearly 30% due to a stock market pullback and disappointing Q3 results. There are concerns about Tesla's shrinking profit and the distortion in its reported earnings, with over 16% of earnings being distorted, mainly due to automotive regulatory credits. The article discusses how $1.8 billion of Tesla's profit could evaporate if governments change regulations or as the market for automotive regulatory credits dries up.

FutureCar Staff Oct 31, 2023 6:32 AM PT

Tesla's Potential $1.8 Billion Profit Loss

Tesla's stock has experienced a decline of nearly 30% below its July high due to a combination of the overall stock market pullback and disappointing third-quarter results. The company's net income in Q3 dropped by 44% compared to the previous year, causing concern among investors. Despite this, Tesla remains the most profitable electric-vehicle maker globally.

Earnings can often be distorted, with unusual gains and losses in quarterly reports making it challenging for investors to assess a company's financial health. This issue is not unique to Tesla, but a detailed analysis reveals that Tesla's reported earnings are indeed distorted to some extent. New Constructs, an investment research company that utilizes artificial intelligence, aims to determine companies' core earnings to understand their normalized operating profitability. By subtracting core earnings from reported earnings, the earnings distortion can be calculated.

According to an analysis by New Constructs, over 16% of Tesla's reported earnings are distorted. The main cause of this distortion is automotive regulatory credits. Governments incentivize automakers to reduce carbon emissions by providing carbon credits, including automotive regulatory credits. Tesla, as a producer of zero-emission vehicles, receives a significant number of credits that it can sell to other automakers at a profit.

However, there are potential threats to Tesla's distorted profit related to automotive regulatory credits. Governments could change their regulations, impacting Tesla's ability to sell these credits. Additionally, as more automakers increase their production of electric vehicles, the market for automotive regulatory credits may diminish. S&P Global predicts a diminishing opportunity for selling automotive regulatory credits in the European Union after 2025, and the U.S. market could also decline significantly in the future.

While the potential evaporation of a major contributor to profit is a legitimate concern, it is not the sole factor to consider when deciding whether to invest in Tesla. The company has growth opportunities in the robotaxi and autonomous robot markets, which could contribute to significant profit growth. CEO Elon Musk is optimistic about the role of artificial intelligence in making Tesla the most valuable company globally. If this vision becomes a reality, concerns about the earnings distortion caused by automotive regulatory credits will fade away.