Tesla’s Profits Buoyed By Regulatory Credits

Tesla MotorsTesla Motors announced better than expected earnings and two consecutive profitable quarters. Company stocks rose 14 percent to $153.00, bringing its market value to more than $18.5 billion. This is, of course, good news for shareholders, but a closer look at the company’s profitability is important.

Tesla Motors (TSLA)

Tesla Motors (TSLA)
Source: Google Finance

Tesla’s profits over the last two quarters were aided by a significant uplift from selling in Zero Emission Vehicle (ZEV) and other regulatory credits. Without this additional $68 million income, Tesla actually lost $73.8 million from operations, only a slight improvement from 2012 first quarter loss of $89.9 million.

Earning full ZEV credits requires an electric vehicle to deliver 300 miles in-city range and be able to recharge to 95% capacity in 15 minutes, requirements that Tesla’s Model S vehicle cannot meet. However, with the recently demonstrated battery swapping capabilities, California Air Resources Board (CARB) upgraded three Model S trim levels to earn ZEV credits.

But a pending rule change could limit Tesla’s ability to claim these credits, as CARB is considering eliminating the ability to claim credit on battery swapping. Overall, regulatory credits are difficult to predict, as also indicated by Tesla’s second quarter ZEV credits that slid to $51 million from $68 million in the first quarter. But Elon Musk remains bullish on both sales and profit, pointing out that operating margin was 22 percent, up from 17 percent in the first quarter, and confident he can reach his target 25 percent profit margin.