Fourth Consecutive Profitable Quarter for Tesla

on Jul 24, 2020
Updated: Dec 19, 2022

Tesla, one of the Nasdaq’s most traded companies recently, reported on Wednesday the Q2 2020 earnings. Investors had huge expectations since the quarter was supposed to be a historical milestone for Tesla – and it did. 

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The prize – the inclusion in the S&P500 index. One of the conditions to be included on the S&P500 index is to post four consecutive profitable quarters. With this quarter, Tesla met this condition, making it suitable for inclusion. It is one of the reasons why investors speculated so hard on its price – it rose in a similar fashion with Bitcoin before the decline in December 2017.

Tesla Q2 Earnings and the Market’s Reaction

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The actual earnings report had some good and some not so good parts. The company struggled with profitability since its existence, so the big plus is the fact that it managed to pull out four consecutive profitable quarters.

However, a close look at the source of these profits reveals that over $400 million belongs to emission certificates sold to competitors. Under the green regulations, especially in Europe, automakers are forced to produce cars meeting certain CO2 emission levels. Those that cannot, due to their production lines, buy certificates from companies that have them – such as Tesla. In other words, for all the cars Tesla sold in Europe, the company has a certain number of green certificates it can sell to other automakers so that they meet the emissions quota.

Another positive out of Tesla’s earnings is the increase in the free cash flow.  For a company known as burning millions of dollars a day, this is big news for long-term investors.

However, bears can offset it with an increase in accounts receivable – a controversial increase, we might say. Account receivables belong to stock (i.e., cars) sold on credit. The big question here is if Tesla sold emission certificates belonging to cars held on accounts receivable or only those that belong to cars, it already received money from? Depending on how the company recognizes revenue, this is crucial in determining if the profitability was forced this quarter or not.

What Did the Market Do?

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Tesla reported on Wednesday after the market closed. The price bounced to over $1700 on the news, but then fizzled in yesterday’s trading hours.

It looks like it formed a possible double top with the measured move coming around $1300. If that comes to fruition, the $1000 level should be the first level of support.

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