https://edition.cnn.com/2021/01/31/investing/tesla-profitability/index.html [ ] * Markets * Tech * Media * Success * Perspectives * Videos Edition * U.S. * International * Arabic * Espanol * Markets * Tech * Media * Success * Perspectives * Videos [ ] Search Edition * U.S. * International * Arabic * Espanol --------------------------------------------------------------------- * Markets + Premarkets + Dow + After-Hours + Market Movers + Fear & Greed + World Markets + Investing + Markets Now + Before the Bell + Leading Indicator + Global Energy Challenge + Economy + Tracking America's Recovery + Energy * Tech + Innovate + Gadget + Foreseeable Future + Mission: Ahead + Upstarts + Business Evolved + Innovative Cities + Unhackable * Media + Reliable Sources * Success + Boss Files + Risk Takers + Fresh Money + Invest Ahead + Work Transformed + Cars + Homes + Wealth Coach * Center Piece * Perspectives * Videos * International + Switzerland + India + Davos + Reliable Sources + Passion to Portfolio + On: Germany * More + Accessibility & CC + About Us + Newsletters --------------------------------------------------------------------- * World * US Politics * Business * Health * Entertainment * Tech * Style * Travel * Sports * Videos * Features * Weather * More --------------------------------------------------------------------- Follow CNN Business * * * Tesla's dirty little secret: Its net profit doesn't come from selling cars By Chris Isidore, CNN Business Updated 2258 GMT (0658 HKT) January 31, 2021 Demand for electric cars has grown slowly. But the tsunami is coming Demand for electric cars has grown slowly. But the tsunami is coming JUST WATCHED Demand for electric cars has grown slowly. But the tsunami is coming Replay More Videos ... MUST WATCH (16 Videos) [wAAACH5BAE] [1907171640] Demand for electric cars has grown slowly. But the tsunami is coming [wAAACH5BAE] [2007301605] In 2010, Elon Musk had big plans for Tesla. Listen to his predictions Tesla co-founder and CEO Elon Musk introduces the newly unveiled all-electric battery-powered Tesla Cybertruck at Tesla Design Center in Hawthorne, California on November 21, 2019. (Photo by Frederic J. BROWN / AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images) Tesla co-founder and CEO Elon Musk introduces the newly unveiled all-electric battery-powered Tesla Cybertruck at Tesla Design Center in Hawthorne, California on November 21, 2019. (Photo by Frederic J. BROWN / AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images) Elon Musk has a lot to say about Covid-19. Some of it isn't true Tesla Cybertruck Tesla Cybertruck Watch the Tesla Cybertruck's unbreakable windows break Brussels, Belgium, Jan 18, 2019: metallic red Tesla Model 3 and blue Tesla model X at Brussels Motor Show. Brussels, Belgium, Jan 18, 2019: metallic red Tesla Model 3 and blue Tesla model X at Brussels Motor Show. Analyst: We see good things happening with Tesla [wAAACH5BAE] [2001071156] Elon Musk busts a move in Shanghai [wAAACH5BAE] [1903150116] See Tesla's new Model Y [wAAACH5BAE] [1903191555] How Tesla made electric cars sexy [wAAACH5BAE] [1809250618] Tesla's Model 3 is a top seller. But it's not the electric car for everyone [wAAACH5BAE] [1903191158] Hear some of Elon Musk's most ambitious predictions CHICAGO, IL - JUNE 14: Engineer and tech entrepreneur Elon Musk of The Boring Company listens as Chicago Mayor Rahm Emanuel talks about constructing a high speed transit tunnel at Block 37 during a news conference on June 14, 2018 in Chicago, Illinois. Musk said he could create a 16-passenger vehicle to operate on a high-speed rail system that could get travelers to and from downtown Chicago and O'hare International Airport under twenty minutes, at speeds of over 100 miles per hour. (Photo by Joshua Lott/Getty Images) CHICAGO, IL - JUNE 14: Engineer and tech entrepreneur Elon Musk of The Boring Company listens as Chicago Mayor Rahm Emanuel talks about constructing a high speed transit tunnel at Block 37 during a news conference on June 14, 2018 in Chicago, Illinois. Musk said he could create a 16-passenger vehicle to operate on a high-speed rail system that could get travelers to and from downtown Chicago and O'hare International Airport under twenty minutes, at speeds of over 100 miles per hour. (Photo by Joshua Lott/Getty Images) Musk opens up about Tesla's near 'death' [wAAACH5BAE] [1904221739] Hear Elon Musk's bold predictions for Tesla robotaxis Elon Musk's Power Cut_00013520.jpg Elon Musk's Power Cut_00013520.jpg Investor: Have to take 'good and bad' with Elon Musk cnn money tesla model 3 cnn money tesla model 3 Tesla cuts jobs to offset Model 3 cost [wAAACH5BAE] [1810180946] Jim Chanos: Tesla falling behind GM, Audi in software Tesla flies down road tc orig_00001117 Tesla flies down road tc orig_00001117 See Tesla become airborne for over 100 feet New York (CNN Business)Tesla posted its first full year of net income in 2020 -- but not because of sales to its customers. Eleven states require automakers sell a certain percentage of zero-emissions vehicles by 2025. If they can't, the automakers have to buy regulatory credits from another automaker that meets those requirements -- such as Tesla, which exclusively sells electric cars. It's a lucrative business for Tesla -- bringing in $3.3 billion over the course of the last five years, nearly half of that in 2020 alone. The $1.6 billion in regulatory credits it received last year far outweighed Tesla's net income of $721 million -- meaning Tesla would have otherwise posted a net loss in 2020. "These guys are losing money selling cars. They're making money selling credits. And the credits are going away," said Gordon Johnson of GLJ Research and one of the biggest bears on Tesla (TSLA) shares. Tesla top executives concede the company can't count on that source of cash continuing. Read More "This is always an area that's extremely difficult for us to forecast," said Tesla's Chief Financial Officer Zachary Kirkhorn. "In the long term, regulatory credit sales will not be a material part of the business, and we don't plan the business around that. It's possible that for a handful of additional quarters, it remains strong. It's also possible that it's not." The 11 states which will require a certain percentage of cars to be zero emission vehicles, or the automakers to purchase credits from a company like Tesla which has exceeded the target, are California, Colorado, Connecticut, Maine, Maryland, Massachusetts, New York, New Jersey, Oregon, Rhode Island and Vermont. Tesla also reports other measures of profitability, as do many other companies. And by those measures, the profits are great enough that they do not depend on the sales of credits to be in the black. The company reported 2020 adjusted net income, excluding items such as $1.7 billion stock-based compensation, of $2.5 billion. Its automotive gross profit, which compares total revenue from its car business to expenses directly associated with the building the cars, was $5.4 billion, even excluding the regulatory credits sales revenue. And its free cash flow of $2.8 billion was up 158% from a year earlier, a dramatic turnaround from 2018 when Tesla was burning through cash and in danger of running out of money. Its supporters say those measures show Tesla is making money at last after years of losses in most of those measures. That profitability is one of the reasons the stock performed so well for more than a year. But the debate between skeptics and devotees of the company whether Tesla is truly profitable has become a "Holy War," according to Gene Munster, managing partner of Loup Ventures and a leading tech analyst. "They're debating two different things. They'll never come to a resolution," he said. Munster believes critics focus too much on how the credits still exceed net income. He contends that automotive gross profit margin, excluding those sales of regulatory credits, is the best barometer for the company's financial success. "It's a leading indicator," of that measure of Tesla's profit, he said. "There's no chance that GM and VW are making money on that basis on their EVs." The future of Tesla Tesla's lofty stock performance -- up 743% in 2020 -- makes it one of the most valuable US companies in the world. Yet the 500,000 cars it sold in 2020 were a sliver of more than 70 million vehicles estimated to have been sold worldwide. Tesla shares are now worth roughly as much as those of the combined 12 largest automakers who sell more than 90% of autos globally. What Tesla has that other automakers don't is rapid growth -- last week it forecast annual sales growth of 50% in coming years, and it expects to do even better than that in 2021 as other automakers struggle to get back to pre-pandemic sales levels. Tesla disappoints Wall Street despite strong profits Tesla disappoints Wall Street despite strong profits Tesla disappoints Wall Street despite strong profits The entire industry is moving toward an all-electric future, both to meet tougher environmental regulations globally and to satisfy the growing appetite for EVs, partly because they require less labor, fewer parts and cost less to build than traditional gasoline-powered cars. "Something most people can agree on is that EVs are the future," said Munster. "I think that's a safe assumption." While Tesla is the leading maker of electric cars, it faces increased competition as virtually every automaker rolls out their own EVs, or plan to do so. Volkswagen has passed Tesla in terms of EV sales in most of Europe. GM said last week it hopes to shift completely to emissions-free cars by 2035. "The competition is rendering Tesla's cars irrelevant," said GLJ' Resarch's Johnson. "We do not see this as a sustainable business model." Other analysts contend Tesla's share price is justified given how it can benefit from the shift to electric vehicles. "They're not going to stay at 80-90% share of the EV market, but they can keep growing even with much lower market share," said Daniel Ives, a technology analyst with Wedbush Securities. "We're looking at north of 3 million to 4 million vehicles annually as we go into 2025-26, with 40% of that growth coming from China. We believe now they are on the trajectory that even without [the EV] credits they'll still be profitable." * * * * * * * [ ] Search * World + Africa + Americas + Asia + Australia + China + Europe + India + Middle East + United Kingdom * US Politics + The Biden Presidency + Facts First + US Elections * Business + Markets + Tech + Media + Success + Perspectives + Videos * Health + Food + Fitness + Wellness + Parenting + Vital Signs * Entertainment + Stars + Screen + Binge + Culture + Media * Tech + Innovate + Gadget + Foreseeable Future + Mission: Ahead + Upstarts + Work Transformed + Innovative Cities * Style + Arts + Design + Fashion + Architecture + Luxury + Beauty + Video * Travel + Destinations + Food and Drink + Stay + News + Videos * Sports + Football + Tennis + Equestrian + Golf + Skiing + Horse Racing + Motorsport + Formula E + Esports * Videos + Live TV + Digital Studios + CNN Films + HLN + TV Schedule + TV Shows A-Z + CNNVR * Features + Call to Earth + Freedom Project + Impact Your World + Inside Africa + 2 Degrees + CNN Heroes + All Features * Weather + Climate + Storm Tracker + Wildfire Tracker + Video * More + Photos + Longform + Investigations + CNN Profiles + CNN Leadership + CNN Newsletters + Work for CNN --------------------------------------------------------------------- Follow CNN Business * * * --------------------------------------------------------------------- Most stock quote data provided by BATS. 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