Tesla: A Q3 Profit Conceals Underlying Problems

  • In a previous article, I argued that, in the absence of $397 million in regulatory credit sales, Tesla lost money in Q3.
  • Spurred by the feedback of several readers, who pointed out my failure to factor in tax effects in my analysis, I took another look.
  • Factoring in tax provisions’ impact on EBT, I find that Tesla did manage a small operating profit in Q3 after excluding credit sales.
  • Tesla’s profit remains heavily dependent on credit sales, which accounted for all of the company’s profits in the first half of 2020, and 77% of EBT in Q3.
  • As the value of regulatory credits fade, Tesla will struggle to show consistent profitability, which may weigh on its lofty valuation.

Tesla (TSLA) claimed a GAAP net income of $331 million for Q3. In a recent article, “Tesla’s Third-Quarter Results Prove It Still Can’t Make A Profit Selling Cars,” I argued that this profit was largely illusory, having come from regulatory credit sales rather than selling cars.

However, as several commenters have pointed out to me since, this analysis suffers from a lack of consideration of tax effects to net income. Taking that criticism to heart, I decided to return to the Q3 earnings report for a second pass at determining whether Tesla managed to eke out a small profit after all.

Let’s see what we can find out.

Was Q3 Profitable After All?

Having sold $397 million in regulatory credits during the quarter to achieve its $331 million profit, it appeared at first glance that Tesla had once again failed to make money from its core business, making and selling electric vehicles. Subtracting the regulatory credit sales from net income, we get a loss of $66 million. While somewhat crude, this calculation has seen fairly wide use among Tesla watchers, including the likes of Seeking Alpha’s Andreas Hopf and Twitter’s TeslaCharts: