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While Tesla topped 1 billion USD in underlying profits for the first time this year in Q1 and pocketed a significant profit f

Before Tesla started its operation in India early this year, the EV leader had reported 10.3 billion USD in sales and net income of 438 million USD in the first quarter of 2021. It reported a growth of 74% from a year ago while also making 101 million USD on Bitcoin sales, its next big bet.

Earlier this week, Tesla Inc presented its quarterly earnings. It reported that it has manufactured 180,338 vehicles in the first quarter and has delivered more than 184,777 vehicles (1).

In a statement, the EV maker said that they had achieved their highest ever vehicle production and deliveries in the first quarter. It happened despite several challenges that could have impacted its growth, including supply chain instability, seasonality, and the transition to the new Model X and Model S.

The electric car manufacturer further added that because of the launch of new factories, new products, and the reduced mix of Model X and Model S, the company’s average cost has declined to sub 38k USD per vehicle in Q1.

Tesla also said that it believes in Model Y to become a category leader and the best-selling vehicle of any kind worldwide.

Tesla has clocked in about 101 million on the sale of bitcoin in the initial quarter. The leading EV manufacturer had announced in January 2021 that it had purchased 1.5 billion USD worth of cryptocurrency and started allowing customers to pay for the cars using bitcoin.

The electric car maker also informed that it is currently building Model Y capacity at Gigafactory Texas and Gigafactory Berlin. It is also working on expanding Shanghai Gigafactory over time (2).

The Impact

Earlier this week, Elon Musk, the Chief Executive Officer of Tesla, confirmed on Twitter that the globe’s largest electric car manufacturer had sold about 10% of its bitcoin holding. The company made a move to check the liquidity of the world’s most significant cryptocurrency.

According to his tweet (3), Musk has not sold any of his bitcoin holdings yet. The latest comments from Musk came as a response to Dave Portnoy’s accusations. He had criticized Tesla’s bitcoin pump and dump movements.

Portnoy had tweeted (4), ‘Do I understand this correctly? Elon Musk purchases Bitcoin. Then, he pumps them. It goes up. Then he dumps them and makes a fortune. I have one BTC, but bitcoin is exactly what we thought it was. Do not be the last one holding it.’

Musk replied with a clarification that he had not sold his Bitcoin. Tesla has sold 10% of its holdings to essentially prove the liquidity of bitcoins as a substitute to holding funds on the balance sheet.

In February this year, Tesla revealed its 1.5 billion USD investment in the most valuable digital currency across the globe (5). The firm started accepting bitcoin as a mode of payment for its products, including Model 3, Cybertruck, Model S, Model X, and Model Y (6).

As per the latest financial results that Tesla had posted, the company witnessed a positive impact on bitcoin sales in the first quarter of 2021. The global electric car maker generated net proceeds of 272 million USD from the recent bitcoin sale.

Wu Blockchain, a crypto researcher, mentioned on Twitter (7), ‘Tesla appears to be selling about 56k USD and purchasing 33,500 USD, gaining 272 million USD and making 101 million USD profit. Musk stated that the company sold a part of its holding to prove the value of BTC’s liquidity. So far, bitcoin has not been affected by the news and continues to rise moderately.’

It is worth highlighting that the world’s largest cryptocurrency is back above the one trillion USD market cap. In the past 24 hours, as of 27 April 2021, the overall market cap of digital currencies is up by over 100 billion USD.

And after Elon Musk reiterated the company’s commitment to the digital currencies, bitcoin has gained as much as 1.9% and has been traded about 54k USD.

The company believes in bitcoin’s long-term value, said CFO Zachary Kirkhorn in an earnings call Monday.

Tesla stated that ‘year over year, positive impacts from regulatory credit revenue growth, volume growth, gross margins improvement accelerated because of further cost reduction and sale of bitcoin, 101 million USD positive impact, net of related impairments in restructuring and other line were mainly offset via a lower ASP, higher SBC, additional supply chain costs, research and development investments, and other costs. Model X and Model S changeover costs negatively impacted both gross profit and R&D expenses.

Kirkhorn stated on the call that Tesla poured capital in bitcoin to earn a yield on its excess cash in a low-interest-rate setting. While the company is continually dealing with global supply chain obstacles such as shortages of semiconductor and ship port capacity, he believes that the bitcoin market is a liquid market with an optimistic future (8).

Despite bitcoin’s perception as a high-risk asset among the most convenient financial analysts, Kirkhorn believes that there are not many traditional opportunities to do this. Or at least, they found, particularly, with yields being so low and without taking on additional risk or sacrificing liquidity.

He further added that Tesla aims to hold what it has long-term and keep accumulating bitcoins from our customers’ transactions as they buy vehicles. Kirkhorn also hinted at Tesla soon making bitcoin-related announcements.

Bitcoin had witnessed an increased legitimacy and spurred its value rally when Tesla made the surprise announcement of accepting them as a payment form (9).

Tesla: Environmental Credit Boost Profits

Elon Musk had made a strong start this year, with Tesla witnessing rising profits and record-high deliveries of its electric cars. Despite several production hurdles to a worldwide shortage of computer chips, it made breakthroughs that hit other car manufacturers.

Elon Musk stated that the shortage of chips also caused supply chain challenges, even though the issue has now eased. The profits of the initial three months of this year are 438 million USD, up from 16 million USD last year. It has been bolstered because of bitcoin sales and environmental credits (10).

However, Tesla’s profits are dented by a 299 million USD payment to Elon Musk as part of a controversial plan struck in 2018.

Additionally, Tesla’s revenue also rose to 10.4 billion USD from 6 billion USD in the same quarter the previous year. Elon Musk claimed that his company’s Model 3, a midsize sedan was the best-selling luxury sedan of any kind in the globe for the quarter. It demonstrates that an EV can be a category leader and outsell its gasoline-powered counterparts.

Musk has also predicted that Tesla’s midsize sport utility Model Y would become the best-selling vehicle in the upcoming years. The company has stated that so far, Model Y has received a strong reception from customers in China, where Tesla started manufacturing last year.

There is a probability of China becoming the world’s most competitive market for electric vehicles, with hundreds of EV makers vying for a slice of the rising market (11).

Can Tesla Outpace Lofty Expectations?

Even though Tesla topped 1 billion USD in underlying profits for the first time this year in Q1 and pocketed a significant profit from its bitcoin, it has still failed to meet Wall Street’s sky-high expectations (12).

After splashing out 1.5 billion USD on purchasing bitcoin in February, the electric car manufacturer revealed a 101 million USD positive impact and stated that it had sold 10% of its holding in the bitcoin during the quarter, making proceeds of 272 million USD.

As revealed earlier this month, record deliveries in the first quarter led to automotive revenues skyrocketing 75% to 9 billion USD and total turnover jumping up to 10.4 billion USD from about 6 billion USD a year ago. It either beat or missed consensus analysts’ estimates from Bloomberg and Refinitiv.

Considering the GAAP basis, net income reported pre-tax profits of 438 million USD was up more than 2600% on the same period the previous year, noting the company’s seventh profitable quarter in a row, with EPS, earning per share jumping 1850% to 0.39 USD.

Adjusted EPS, excluding exceptionals and bonuses, came out at 0.93 USD, which beat Street’s 0.79 USD forecast. The performance during the quarter also means that billionaire boss Elon Musk qualifies for two bonus options payouts worth a total of 11 billion USD (13).

Underneath the Headline

If we look under the bonnet of revenue figures and robust care sales made in the newer Shanghai Gigafactory were partially offset by an 83% drop in higher-priced cars, Model S and Model X, as Tesla is shifting all its production towards its lower-margin and cheaper products.

Additionally, it is worth noting that the Model 3, about three and a half years after the launch, was the best-selling premium sedan globally. It has outsold long-time favorites such as the Mercedes Benz E-Class and BMW 3 Series, demonstrating that an electric car can be a category leader and outsell its gasoline-counter paters.

Even though there has been a shift in sales and a 13% decline in average sales price, operating margins of 5.7% were up on the preceding quarter’s 5.4% and the 4.7% from the same period the previous year, indicating lower average production costs.

Because of the launch of new models and the lower costs at the factory in China, the average cost per car came in below 38k USD in the quarter, a massive improvement on the eye water 84k when it started manufacturing Model 3 in 2017.

Automotive gross margins also improved by over one percentage point to 26.5%. But, if the 18 million USD made from selling environmental regulatory credit is excluded, the automotive gross margin would have been 22%.

Since Tesla made investments in finishing the Autin, Berlin, and Texas Gigafactories to ramp up the production of the Model and the change over to newer Model S and Model X variants, its capital expenditure tripled year-on-year to 1.3 billion USD.

In combination with the bitcoin purchase, Tesla’s free cash flow in the quarter dropped to 293 million USD from 1.9 billion USD the preceding quarter.

Nonetheless, Elon Musk is quite optimistic about Tesla’s growth. It is looking forward to the growth of production volume by over 50%. He also stated that the company is on track to initiate production and deliveries at its new factories in Berlin and Texas.

The company also believes that it would grow faster in the year 2021 and stated that the growth rate would depend on its equipment capacity, operational capacity, and efficiency, and supply chain stability (14).

The Bitcoin Move

Apart from generating revenues from selling bitcoin, Tesla also earns credits for exceeding emissions and fuel economy standards and then selling them to other manufacturers that fall short so that they can avoid penalties.

The firm earned more than 518 million USD from sales of those credits in the initial quarter this year, a 46% increase over the same quarter in 2020.

Tesla stated that it had delivered about half a million cars in 2020 and over 185k cars in the first quarter of 2021. It expects to increase its deliveries by 50% annually. It ramps up its production at its existing facilities in Shanghai and California while building new factories in Berlin and Texas (15).

Tesla is the most valuable car company worldwide, with its share price pushed higher by its investors betting on Elon Musk and strong growth in EVs in the coming years.

Yet, the company still makes fewer far cars than its legacy counterparts, such as Volkswagen and Toyota, which each sold over mine million cars last year.

Nicholas Hyett (16), an equity analyst at a stockbroker firm, Hargreaves Lansdown, stated that there could be several problems ahead despite the generally positive results.

He stated that there is a complete lack of guidance about near-term production headwinds. There are expectations that the worldwide shortage of computer chips would limit the production capacity of all car manufacturers in the immediate future. And, Tesla won’t be an exception. Considering the ongoing necessity of its production ramp-up, Tesla may even get a heavy impact.

Even though Tesla has made a profit from Bitcoin sales, Hyett believes that there were several skeptics. While the company has made some 101 million USD on its investment, which is all good and well, massive losses and gains are not really what corporate treasuries are all about.

Investors can argue that if they wish to have exposure to bitcoin, they would have bought some themselves and don’t need Tesla to do it.

However, Tesla is not known to play by the rules, and so far, it has not stopped it from being a winner.