Zero-Emission Vehicle Credits: The One 'Product' That Tesla Actually Earns A Profit On

As we pointed out last week when Tesla reported its Q2 earnings, making products that actually generate a return on capital for shareholders isn't a strong suit of the Silicon Valley powerhouse.  In fact, Elon Musk managed to burn through a record $1.2 billion of cash in Q2 alone, or roughly $13 million dollars every single day.


But, as Bloomberg points out today, there is at least one product where Tesla manages to earn a staggering margin of roughly 95%.  It's called a Zero-Emission Vehicle (ZEV) credit and it's pretty much the only reason that Tesla managed to 'beat' earnings in Q2.

I'm referring to zero-emission vehicle, or ZEV, credits. California and several other states require that a certain proportion of the vehicles sold by an automaker emit no greenhouse gases. These cars earn the automaker credits, and if they don't have enough to meet their quota, they can buy extra ones from someone who does. As Tesla only makes vehicles that run on batteries and emit nothing, it usually has a surplus for sale.


The profit margin on these is very high, perhaps 95 percent. The implied $95 million of profit equates to about 58 cents a share. Tesla reported a loss of $1.33 per share this week -- beating the consensus forecast by 55 cents.


This isn't the only time ZEV credits have played a big role for Tesla. Looking back to early 2013, selling credits has given Tesla's earnings extra oomph in many quarters, likely taking them above consensus forecasts in some (on an implied basis, assuming that 95 percent margin):


After selling $0 worth of ZEV credits in 1Q 2017, Tesla managed to sell $100 million worth in 2Q with roughly $95 million, or $0.58 per share, flowing straight to the bottom line.

Of course, this isn't the first time that ZEV credits played a huge role in padding Tesla's earnings.  Who can forget Q3 2016 when a $139 million in sales pushed Tesla's earnings into positive territory for the first time in years?

One notable period there is the the third quarter of 2016. This was the one where CEO Elon Musk exhorted his employees to "throw a pie in the face" of Tesla's critics by delivering thumping results. It worked, although at the cash-flow level it also owed quite a bit to suppliers.


But ZEVs provided a big tailwind: At $139 million, Tesla booked more revenue from selling the credits that quarter than any other. Using my margin assumption, they added 84 cents per share to earnings, turning a loss of 13 cents into a profit of 71 cents.


In short, as taxpayers we're all doing our part to help the environment by enriching one eccentric billionaire in Silicon Valley...which presumably makes sense to some politicians in Sacramento.