Bull Case for Tesla Stock with support from Bitcoin & Regulatory Credit
As of today, I own Tesla stock and options. So whatever you read here can be biased based on my position.
Honestly speaking, I own Tesla stock not because of the business. I still don't think, it is a sustainable business. So observing the business vs stock price comparison is real entertainment for me every day. On top of it, I see so many amusing statements from people like Cathy Wood from ARK investment about the future of Tesla. But She fails to say why.
So before talking about the future I will go back to Tesla’s earning statement from 2020. Looking at Q4, 2020, Tesla earned $401 million in regulatory credit. Do you remember how much was Tesla’s profit in Q4, 2020? It was $270 million. Forgetting about all the jargon, just using common sense, you can tell that tesla’s actual business of selling car is running at a $131 million loss.
So now all the tesla fan might yell at me and why you are not calling selling regulatory credit sales a legit vehicle business. The reason is ……it depends.
So let's go back and check what actually regulatory credit is.
Regulatory credit is something that is mandated by the federal government or state/provincial government to be maintained by every OEM (Ford, GM, FCA, Tesla etc) if they are willing to sell their vehicle in a certain state or overall country.
So suppose in the USA, CARB(California Air Resource Board) tells the OEM that they need to maintain at least 8000 regulatory credit per year to be an active seller in the state. And the only way you can get credits if you sell the electric or hybrid or mild hybrid vehicle in that state. The credit depends on the powertrain of the vehicle as mentioned earlier.
Let's throw some number to make a better understanding. The credit depends on something called All-Electric Range (AER). So even if own a Plug in Hybrid vehicle, it should report something like all electric range. So based on your AER, you are assigned a credit for each vehicle you sale. So if Ford , GM sells a vehicle which has AER of 100 mile , they will get around 1.5 credit for the vehicle sale. Where as a TESLA which has more than 350 miles of AER can get 4 credit for each vehicle sale.
As Tesla only sells Pure electric they get way more regulatory credit than other Automakers.Whereas other OEM’s cannot meet the requirement. And the governement fines the automaker if they cannot meet the requirement. And it is a pretty hefty fine. It is like $5000 for not meetin each credit. Which is huge for those automaker.
But there is another option for them. Rather than giving the money to government, they can buy it from someone else who has more credit than they need.
There comes the regulatory credit sale for tesla. They sell credit to other automaker so that the other OEM dont have to pay the hefty price to Government. Generally Tesla deals it in a cheaper way than the government so other automakers are interested in buying it from them.
But there are risk.
- What if governement doesn’t allow other Automakers to buy it from Tesla. They want the money themselves to compensate for the stimulus they have been paying during Covid. There goes the profit for Tesla.
- What if other Automakers catchup and make enough electric vehicles. Then they dont need to meet the requirements seperately. Again goes Tesla’s Profit. The reality is they are catching up really quick.
Any of those above case can make tesla bankrupt in a spur of moment.
But there can be some more opportunities for Tesla too.
- What if the new US government and european government increases the number of Regulatory credit required for all the automakers and still allows buying it from others rather than paying fine to governement.
- What if tesla gets hold of another type of asset that gets skyhigh valuation. I know what you are thinking. Must be the battery technology.
You are wrong , my friend. It is actually Bitcoin. Lets deep dive into it .
Tesla bought around $1.5 billion worth of Bitcoin sometime in January. I am guessing after Jan 21 .It was around $35K per bitcoin in that time frame. As of this writing the price of bitcoin is around 58K. So around 66% increase in value. Now just think how much tesla investment became now on Bitcoin. It is supposed to be $2.48 billion in profit. So go back and what is the total revenue Tesla had in whole 2020. It was around $1.5 billion. So in 2021 it already made PROFIT of around $1 billion before even ending 1st quarter.
This is the reason I am betting on Tesla Stock. I dont trust the buisness , but the accounting tells me charismatic Elon Musk will use this balloning asset price to hide the troubling buisness that he is running. And it will work even Tesla cannot sell any regulatory credit.
The only risk here is Bitcoin’s Volatility in price. Cathy Wood and Elon’s promise on hype and technology is a lie. It is all in cryptic nature now and depends on crypto currency.