Thursday, April 30, 2020

Sale of regulatory credit by Tesla

The average forecast of Wall Street analysts was a loss of $0.36 per spare for Tesla for 1Q 2020. The actual results showed a profit of $1.24 per share.

Why were the analysts wrong? One contributing factor was the income of $354 million from the sale of regulatory credit, which is 64% higher than 1Q of 2019.

What is this regulatory credit? It is given to a car manufacturer based on the qualifying vehicles that it sold. This is to encourage manufacturers to move to electric vehicles.

If the car manufacturer did not achieve its quota, it has to pay a penalty on the shortfall. Alternatively, it can buy the credit from another manufacturer like Tesla.

As Tesla makes only electric vehicles, it has a lot of regulatory credit to sell to other manufacturers.

The question is - why does Tesla sells more credit during 1Q 2020 than normal? The answer is simple - Tesla lowers the price of the regulatory credit to get the revenue booked in the quarter, so that it can show a profit.

It is a simple business strategy. All businesses lower the price to increase the sales, right?

In spite of the challenges for 2Q 2020, I expect that Tesla will continue to make a profit. They will then qualify to be included in the S&P 500.

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