The secret source of cash for Tesla (NASDAQ:TSLA) came from an unexpected source — its peers.
According to Bloomberg, both General Motors (NYSE:GM) and Fiat Chrysler (NYSE:FCAU) disclosed to the state of Delaware that they had bought greenhouse gas credits from the Palo Alto, California-based automaker. Such sales brought in roughly $2 billion in revenue over the last eight years.
That helped to reduce losses for the company. However, I do not see it as something that will materially influence the price of Tesla stock long-term.
Sales of Credits Help Mitigate Losses
Income derived from selling greenhouse gas credits has risen steadily over the last eight years. Beginning at negligible levels in 2011, sales of these offsets has steadily increased, reaching $420 million by 2018. That makes up less than 2% of the $21.46 billion in revenue earned by Tesla in 2018. However, it prevented its $976 million loss in 2018 from going much higher.
Tesla stock fell in Monday trading following this news. However, it quickly recovered most of those losses the next day. I think this is because the market sees what I see — the fact that this will make little difference to the future of the company.
These offsets serve as a reminder of how important politics has become to Tesla. Analysts have long factored in the tax credits offered by the federal government and some states for those who purchase electric vehicles (EVs). In its home state of California, the government requires automakers to produce zero-emission vehicles in proportion to their share of the automobile market. Those companies who cannot comply must purchase the greenhouse gas credits.
GM had purchased offsets from Tesla on fears of future regulation. They produce the all-electric Chevy Bolt and its plug-in Chevy Volt. As a result, GM remains compliant with regulators despite most of its sales coming from so-called gas guzzlers. However, GM fears the government will impose more stringent standards in the coming years, making the credits necessary. Whether this move will profit GM depends on the future. However, I think it offers assurance to holders of GM stock who worry that the equity could sink over compliance issues.
Revelation Changes Little for Tesla Stock
Still, reassuring GM shareholders can offer only so much comfort to Tesla. For all of the talk about credits, the company still must deliver on vehicle sales. TSLA stock has now lost more than half of its value since its December peak. It has fallen this year due to lower-than-expected demand for its EVs.
China-related concerns also weigh on Tesla stock. Tesla built a factory in China recently. However, as our own Wayne Duggan reported, production estimates for that factory have fallen from 70,000 to 40,000 for this year. Also, China has become the world’s most important market for EVs, and the threat of tariffs could harm TSLA. Some analysts believe Tesla will get an exemption from these trade-related duties. Still, until traders know that, the uncertainty will likely hurt Tesla stock.
Final Thoughts on Tesla Stock
The revelation that GM and Fiat Chrysler bought credits from Tesla relieves one concern about Tesla’s sources of revenue. However, Tesla stock will trade on vehicle sales and China-related concerns in the near term.
TSLA stock quickly recovered the losses that came about following the announcement of the mystery revenue source. This gives Tesla another source of revenue. It also serves as a reminder that the company partially depends on policies such as credits and, in the past, tax credits for sales of EVs.
While some might find it interesting, I see the impact on Tesla stock as minimal. Yes, selling these credits has helped reduce losses. Still, the direction of Tesla stock depends mainly on vehicle sales and its ability to mitigate outside threats such as the impact of China tariffs. If the company cannot continue to sell more of its cars, its value as a source for emissions credits will decline along with Tesla stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.