Tesla Myth: “Tesla Is Losing Money Making Cars”
Around the end of April, Car and Driver reported that Tesla “continues to lose money making vehicles,” which is completely opposite of the truth. The article noted that Tesla shared good Model 3 and Model Y delivery numbers and then focused on the media reports of a Model S that crashed with “nobody at the wheel.” Not only was the article based on some misinformation, but it was successfully debunked by Sam Alexander, who shared his thoughts in a video on YouTube.
Sam shared his thoughts on why Car and Driver wanted to focus on a certain aspect of Tesla’s Q1 2021 earnings report while ignoring the rest of it.
“First of all, we need to establish why Car and Driver and other media outlets like them might be motivated to represent Tesla in the worst light possible.”
Sam’s goal is to provide clarity as to why there’s a lot of media FUD around Tesla and Elon Musk. The answer, he believes, is due to a heavy financial motivation to cover Tesla negatively. He shared the list of the top 25 global advertisers by spending.
“A large part of it can be boiled down to ad revenue. If you look at the list of the top 25 global advertisers by total spending, Volkswagen, Toyota, and General Motors and Ford are all on that list. This is billions of dollars going into advertising per year that’s going into paying media outlets like Car and Driver.”
He explained that the better traditional automakers do, the more they spend on advertising, which is how these media companies get paid. This is why many media outlets have a financial incentive to cover these car manufacturers in a positive light.
“If you’re being paid by the automotive manufacturers for advertising, there’s a major conflict of interest in covering them. Tesla, on the other hand, doesn’t pay for advertising. So when these media outlets cover two companies, one of them is paying them and Tesla isn’t, well, you can see why they have a hard time remaining unbiased even if they try. That being said, I think that with a lot of these media outlets, the idea of remaining as unbiased as possible is a completely foreign one. They’re simply mouth pieces for whoever pays them.”
Editor’s note: I know this is a common belief, and I’m sure it happens to some extent, but I personally don’t subscribe to the idea that this is very prevalent or relevant. I think it is a minor factor that sometimes might influence a piece or two (I have heard some stories), but I don’t think it really has much to do with writers’ coverage of Tesla.
Headline vs. Actual Data
In the next part of the video, Sam compares the headline of the mentioned article with Tesla’s Q1 2021 financial data. He pointed out that “Tesla is losing money selling cars” isn’t an accurate or nuanced way to present the information.
“What’s so frustrating to me is the point of the article should be to educate Car and Driver‘s readers on what the truth is in regards to Tesla’s quarterly earnings report. But it doesn’t take long to see that’s clearly not what the author is trying to do. This low-level and super unsophisticated analysis gives people the wrong idea as to what’s actually going on.”
Example: Amazon
Sam shared an example of Amazon to point out similarities between it and Tesla. He noted that for decades, Amazon didn’t have any net income which would lead one to think they weren’t doing well.
“Zero net income can mean that the company is spending all of its revenue on growth. If we check out Amazon’s net income relative to revenue we can see that, yeah, clearly Amazon was exploding but you wouldn’t get that picture if you just looked at income like this Car and Driver article is. And Tesla is doing the exact same thing. In order to maximize their speed of growth, they’re spending every spare dime they can on expansion. So, when you look at their net income, it’s totally expected that it would be low or even negative at times.”
A Quick Look At Why Tesla’s Net Income Reflects A Focus On Growth
Sam pointed out that Tesla’s net income should be low since it’s focusing on growth, and pointed to one main example of Tesla’s growth: Tesla’s Gigafactories in Texas and Berlin. Giga Shanghai is already operational and once Giga Berlin and Giga Texas are fully operational, they will add massive lines of income for Tesla.
“Because they are in construction right now, they’re only shown as expenses. If we look at their capital expenditures, it’s the highest they’ve ever been. That’s because of how quickly Tesla is growing. If Tesla didn’t build these factories, their capital expenditures would be low, and therefore their net income would be much higher. So, in the short term, they would look more profitable, but that’s such a short-term view. Tesla’s building its factories as an investment in their future just like what Amazon did. It’s super common for companies to not hardly have any net income because any net income that they would’ve had they just put back into the company for more growth. “
Tesla’s Spending on Research & Development
Sam noted that compared to last year, Tesla has more than doubled its spending on research and development (R&D).
“Their minimal net income isn’t just from increased capital expenses, but they’ve also more than doubled the amount they’re spending on R&D when compared to Q1 of last year. R&D is an investment into the future of the company and it’s just another way that Tesla is exchanging current income for current growth and future income. “
Tesla’s Actual Sales Numbers
Sam noted that in the automotive industry, Q1 is normally slow. This translates to both low sales and low revenue. January through March is commonly known for having the worst automotive sales in the year. In the video, he pulled up a graph that reflected this and then pulled up Tesla’s sales for Q1 2021. For Tesla, this was not a normal Q1.
“They more than doubled their sales from Q1 2020.”
He noted that 2020 wasn’t a great year, so this wasn’t a great comparison, but then continued.
“What’s more impressive is that they increased their sales from Q4 2020, and that’s despite the S and X sales going close to zero, meaning that [the] sales growth was coming from the Model 3 and the Model Y. And not only that, but both Giga Texas and Giga Berlin are planned to start production this year — in 2021. So Tesla’s production capacity is about to explode.”
Sam noted that this is the year that Tesla will start producing the Cybertruck, which will cause massive disruption in the pickup truck industry.
“If we get to the actual crux of Car and Driver‘s argument, which is that they are losing money selling cars because they only have a positive net income from selling regulatory credits, well, let’s take a little bit closer look on that. Tesla had a net income of $438 million and they made $518 million from selling regulatory credits to other automakers. So, just from looking at that, we can see that without selling regulatory credits and if everything else is held constant, they’d have a net income of -$80 million. $80 million might sound like a lot but for a company that’s doing around $10 billion in revenue, it’s really not that significant at all and it would’ve been less than 4% of their gross profits.”
Sam noted that if Tesla didn’t have those regulatory credits, it would have adjusted its expenses accordingly. It’s just like a Christmas bonus — extra money to put into your business. He used an example of using your Christmas bonus to buy a motorcycle.
“This article is saying, ‘well, yeah but if you didn’t get the bonus then you would’ve taken on debt to buy the motorcycle. But the point is, you got the bonus. That’s why you bought the motorcycle. If you didn’t get the bonus, you wouldn’t have bought it. It’s as simple as that.”
Actually, $80 million spread across 185,000 vehicles is just an extra $432 per vehicle.
The point? If Tesla hadn’t sold those regulatory credits, it would have adjusted its expenses. You can watch Sam’s full video here.
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