Tesla Extends Quarterly Profit Streak, Opens Path to S&P 500

Tesla Inc. posted a fourth consecutive quarterly profit, a milestone that could pave the way for the electric car-maker to join the ranks of the blue-chip S&P 500 Index.

The results validate the unconventional efforts that Elon Musk, Tesla’s chief executive officer, made to shore up earnings in the midst of the global pandemic that’s expected to leave other U.S. automakers posting losses. The profit further boosts Tesla’s already lofty share price, which has quadrupled since March in part based on speculation the stock could be added to the S&P 500. The stock rose as much as 7.8% in late trading.

Tesla reported a profit of 50 cents a share on a GAAP basis Wednesday, beating analysts’ consensus estimate for a loss of $1.06 a share. Revenue fell from a year ago to $6.04 billion, topping analysts’ expectations for $5.4 billion.

“Tesla was gunning for S&P induction, and they hit their target,” said Gene Munster, managing partner at Loup Ventures. “But they didn’t have to pull too many rabbits out of the hat to get there. They did it for reasons that are sustainable.”

S&P Calling?

Tesla’s shares closed just shy of $1,600 Wednesday, up from around $260 a year ago. Buoyed by optimism about growing sales and steps to expand production overseas, the stock’s massive gain has vaulted it into the pole position among global automakers.

The 12-month period of profitability meets criteria that Standard & Poor’s index committee uses when deciding whether to add stocks to the S&P 500. Adding Tesla to the benchmark likely would force money managers who track the index to buy the stock.

In a phone call after Tesla’s results were released, Ray McConville, an S&P Dow Jones Indices spokesman, declined to comment on any individual company and said the index isn’t reconstituted on a pre-determined timeline.

“Companies who meet the eligibility requirements are not automatically added to the index,” McConville said. “They join a pool of other eligible candidates and are considered for inclusion when an opportunity presents itself at which point the index committee takes several factors into account such as sector balance and size representation.”

Credit Boost

Tesla cautioned that achieving its goal of delivering 500,000 vehicles this year has become more difficult. In January, it said it expected to “comfortably exceed” that level of deliveries for the year.

The carmaker handed over 90,650 vehicles in the second quarter, up from 88,400 in the first three months of the year despite a lengthy shut down at its factory in Fremont, California.

Tesla’s sales of regulatory credits to other automakers rose to a record $428 million. That contributed to its hearty 25.4% automotive gross margin and cushioned the negative impact from the coronavirus, which briefly halted production and complicated deliveries.

The Palo Alto, California-based company has benefited from mandates requiring automakers to sell electric and other non-polluting vehicles in proportion to their market share. Any deficiency must be made up by purchasing emissions credits. Fiat Chrysler Automobiles NV said last year it would pool its fleet with Tesla’s to comply with strict new environmental regulations in Europe.

The value of those credit sales has been growing, rising from $354 million in the first quarter and $133 million in the last three months of 2019.

Profit Quest

The earnings give ammunition to Tesla’s investor base and run counter to warnings from short sellers and other critics who doubted the company could emerge from its era of losses. Musk’s quest for stable profits has at times been secondary to his efforts to ramp up output, but it has loomed as a longer-term target — perhaps no more so than at times of peak financial stress.

When Tesla was forced to lay off 9% of its global staff in mid-2018 as it struggled to produce the Model 3 in high volumes, its CEO justified the move in an internal email as a way toward its goal of staying afloat by attaining consistent profitability.

“What drives us is our mission to accelerate the world’s transition to sustainable, clean energy,” Musk said in the email, which he posted on Twitter, “But we will never achieve that mission unless we eventually demonstrate that we can be sustainably profitable. That is a valid and fair criticism of Tesla’s history to date.”

— With assistance by Vildana Hajric, Gabrielle Coppola, Edward Ludlow, and Sophia Cai

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