Musk May Swing Right, But Tesla’s Profit Leans Left

Tesla Inc.’s latest results, released Tuesday evening,seem almost humdrum now thatChief Executive Elon Musk has finally unveiled the least surprising endorsement of a presidential candidate ever. They do remind us, though, that while he may swing with the right, he relies on the left.

Tesla typically generates a few hundred million dollars of revenue per quarter from the sale of greenhouse gas credits. These are the product of state and federal programs to encourage the uptake of electric vehicles, as championed mostly by the left and as denounced mostly by the right.Essentially, other automakers who are struggling to meet regulatory requirements on fleet emissions buy offsetting credits from Tesla which, with itsall electric lineup, accumulates a lot of them.

It just so happens that such revenue had a notable jump in the second quarter, to its highest level ever.

While these may seem like paltry amounts for a company doing $25.5 billion of quarterly revenue —also a record—they carry an effective gross margin of 100%. So theypunch above their weight, accounting for almost a fifth of Tesla’s gross profit in the second quarter, the highest proportion in more than three years.

This proved a big help because, despite the record top line, profits weren’t feeling it. Indeed, Tesla’s underlying automotive gross profit margin, excluding regulatory credits — one of itsmost closely watched metrics — slipped beneath 15%, roughly half the levels of two years ago. Tax-adjusted, those regulatory credits equate to almosthalf of Tesla’s earnings per share —which still missed the consensus forecast for the fourth quarter in a row.

The reliance on revenue from the sort of subsidy programs that former President Donald Trump rails against serves to highlight the main problem facing Tesla’s core automotive business. It sold more vehicles than expected in the second quarter, albeit only after those expectations had collapsed. This cleared some of Tesla’s growing pile of unsold vehicles; notably, a $1.8 billion inventory decline accounted for all of Tesla’s free cash flow and then some. But it was achieved via the oldest of Detroit tactics, discounting and cheap financing, which had the predictable effect on average selling prices and, therefore, margins.

Unlike Detroit’s incumbents, however, Tesla trades at a stratospheric multiple. General Motors Co., which reported another healthy beat-and-raise quarter on Tuesday, is priced at less than 5 times forward adjusted earnings, compared with Tesla’s 85 times.

Given the weakness in Tesla’s main electric vehicle business, the company is keener than ever to talk up the visionary stuff. The robotaxi theme was front-and-center, of course. Indeed, asked on Tuesday evening’s callif any Republican rollback of the Inflation Reduction Act would hurt Tesla, Musk answered, improbably, that the impact would be “slight" and then pivoted immediately to saying Tesla’s value related “overwhelmingly" to autonomy anyway. Curious, then, that Musk declined to answer questions about what might becoming at the company’s delayed “robotaxi reveal" and thechief financial officer brushed off a question asking exactly how many Tesla buyers were taking the Full Self Driving upsell.

There was a bright spot in the form of Tesla’s energy business, which reported its highest installations of batteries and revenue ever. Inevitably, some bulls havejumped on the datacenters-will-eat-the-gridbandwagon to argue that Tesla is not only an AI giant in waiting but alsoan AI-juicing giant in waiting, too. Besides the layering of hypes there, keep in mind that even at this record level, energy accounted for just 12% and 16% of Tesla’s revenue and gross profit, respectively, and that Tesla’s own announcement cautioned that battery deployments “would continue to fluctuate."

By the time Tesla reports numbers again, in October, Musk’s public politicking may have reached even greater …heights? Judging from these numbers, though, and the continuing lack of a clear pipeline of new vehicles, any distraction willprobably be useful.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy. A former banker, he edited the Wall Street Journal’s Heard on the Street column and wrote the Financial Times’s Lex column.

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