Tesla surprises analysts with $104 million quarterly profit

Tesla’s chief executive said on Wednesday that the company had started to build a fourth factory.

By Neal E.Bourdette, Peter Eavis and Matt Phillips

Tesla on Wednesday reported a profit of $104 million, a result that surprised analysts, who were expecting the electric carmaker to lose money as the coronavirus pandemic squeezed the company on two fronts.

Sales for the second quarter, which ended in June, slowed while much of the economy shut down and as millions of people lost their jobs and cut back on spending. And for nearly two months, the company was forced to halt production at its main plant in Fremont, California.

The profit was achieved “despite tremendous difficulties in the quarter,” the company’s chief executive, Elon Musk, said in a conference call with analysts. “We were able to achieve a fourth consecutive profitable quarter. Although the auto industry was down about 30% year-over-year, we managed to grow deliveries in the first half of the year.”

Tesla said revenue in the second quarter fell 5%, to $6 billion. Total sales of automobiles declined 5%, to about 91,000 cars, an update to preliminary figures it released earlier this month.

Tesla appears to be weathering the pandemic better than some other automakers. In China, the world’s largest market for electric vehicles, the company has benefited from a new factory near Shanghai that began production late last year. The plant enables Tesla to avoid the tariffs China imposes on imported vehicles and has made its cars more affordable to Chinese consumers.

Tesla has started work on a fourth car factory at a site near Austin, Texas, Musk said.

The factory will produce Tesla’s new electric pickup truck, the Cybertruck, and a new semi truck, along with the Model 3 and Model Y, which it already makes at a factory in the San Francisco area. The new factory represents a substantial investment for Tesla.

The company’s profit was also made possible by the sales of $428 million in emissions credits to other automakers who need them to meet regulatory standards. That’s nearly four times as many credits as it sold in the same quarter a year earlier.

Tesla said it ended the quarter with $8.6 billion in cash, up $535 million from the end of March.

Musk Up for $2 Billion Reward

Musk’s compensation is driven largely by the performance of Tesla’s stock. And as the carmaker’s share price has soared in recent weeks, he stands to receive a stock award worth roughly $2 billion.

The awards are part of an unusual compensation package, set up in 2018, meant to release shares in 12 installments as certain milestones — market value and operational measures such as revenue or a measure of earnings — are met. The first payout under that plan occurred in May and now is also worth close to $2 billion.

Tesla’s market value recently exceeded $150 billion on average over the past six months and over the last 30 trading days, the threshold for the release of the second batch of shares. And it had already hit the lowest profit goal without considering the company’s second quarter results, in theory giving Musk the operational achievement he needs to get the shares, though the board still has to release the award. If Tesla’s share price stays close to current levels, Musk might even qualify for the third tranche of his stock awards this year.

Critics of the 2018 compensation package questioned why it was necessary. Before the award, Musk already owned a large chunk of Tesla — shares that today are worth around $60 billion. That’s more than twice the $25 billion worth of shares available to Musk through the 2018 package.

S&P 500 Eligibility Unlocked

Tesla’s surprise profit set it up for another major milestone: potential inclusion in the S&P 500 index. The index is one the most widely followed measures of the performance of the U.S. stock market, with more than $11 trillion worth of mutual funds and other investments measured against it.

It’s unusual for companies with market values as large as Tesla not to be included in the S&P 500. But the company’s inability to consistently generate profits has made it ineligible so far. (Criteria for inclusion require the sum of the company’s fully audited profits in the four most recent quarters to be positive.)

If Tesla were to be included in the index, it could trigger an upward push of its share price by stimulating a surge in demand by institutional investors. Index-based funds — low-cost investment vehicles meant to mirror the performance of indexes like the S&P 500, rather than trying to “beat the market” — must buy any stock included in the index, creating a rush for the shares of companies that are newly added.

“When a company goes in that means there’s a lot of buying there,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, the company that publishes the S&P 500.

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