Tesla put out its Q1 numbers this afternoon and the headline is the headline: first profitable quarter in the company's history, net income of $11.2 million, and the stock immediately took off after hours. My Twitter feed is currently about 40% people I've never heard talk about cars before suddenly having opinions on gross margins. Congrats to everyone who bought in under $40, genuinely.
But I spent twenty minutes actually reading the shareholder letter instead of just retweeting the number, and there's a detail that's getting buried that I think matters more than the headline does.
A big chunk of that profit isn't from selling cars to people. It's from selling regulatory credits to other car companies.
Quick background if you haven't followed this: California (and a handful of states that follow its rules) requires automakers to sell a certain percentage of zero-emission vehicles. If a manufacturer doesn't hit that quota with its own lineup, it can buy ZEV credits from a company that's over-quota, like, say, a company that makes nothing but electric cars. Tesla's been selling these credits to other automakers for a while, but this quarter they apparently sold a lot of them, all at once, to a handful of buyers who needed to true up their compliance numbers before a deadline. Elon acknowledged it on the earnings call when pressed, more or less confirming that a meaningful slice of that $11.2 million wouldn't exist without this mechanism.
None of this means Tesla is a house of cards or that the Model S isn't a genuinely good car (it is, I've sat in one, more on that in a second). It just means "first profitable quarter" is doing a lot of work as a headline when a real chunk of the number is a one-time-ish credit sale rather than repeatable, this-is-our-business-now profit. That's a pretty different story than the one everyone's currently high-fiving about on Twitter. I'd bet money most of the people already writing "Tesla proves EVs can be profitable" posts tonight didn't get three pages into that letter.
Anyway. The personal-aside part of this post: my neighbor two doors down bought a Model S back in the fall, and I cannot overstate how much this man will find a way to bring it up. Grocery store, elevator, standing at the mailbox, doesn't matter. Last week he cornered me for a solid ten minutes about regenerative braking while I was trying to carry two bags of laundry detergent into my apartment. I finally let him take me for a ride around the block a few weeks ago, mostly to get him to stop asking, and okay, fine, it is quiet in a way that's genuinely a little unsettling the first time, and the acceleration is stupid. Like, actually stupid, in the good way. I get why he won't shut up about it. I still wish he'd shut up about it.
I don't own a car at all, for what it's worth, haven't since I moved and started taking the train everywhere, so I'm about as far from the target Tesla customer as it gets right now, price tag alone rules me out for probably another decade. But I find the company more interesting as a business story than as a car story, and today's earnings are a good example of why: the actual mechanics of how they got to "profitable" are more complicated and more interesting than the tweet-length version, and I think that gap between the headline and the footnotes is going to keep showing up with this company for a while yet. Worth remembering the next time a quarter looks great and you're wondering how.
If you want to check my math (or tell me I'm wrong about the credit sale numbers, which is possible, the letter isn't exactly written for readability), the shareholder letter is up on their investor relations page. It's a longer read than you'd expect for a company that only sells one car.