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Globe and Mail
7 days ago
- Automotive
- Globe and Mail
Tesla's Regulatory Credit Cash Cow Is Fading Fast: Why it Matters
For years, Tesla TSLA has made big money not just from selling electric vehicles (EVs), but also from selling regulatory credits to other automakers. These credits have aided Tesla's overall margins, even when car sales were under pressure. But that extra boost is shrinking fast now. And if the trend continues, it could just worsen things for the company. Tesla has been selling billions of dollars' worth of regulatory credits to legacy automakers who needed them to offset their gas-guzzling vehicle fleets and avoid fines. The revenues—more than $10.6 billion since 2019—have been a critical boost to Tesla's profits, especially during times when the core business struggled to stay in the black. In Q2'25, Tesla reported $439 million in regulatory credit revenues. On the surface, that still looks solid. But the trend tells a different story. Credit sales have fallen sharply from $890 million in Q2'24, marking a nearly 50% drop in just a year. And it's not a blip—it's a steady slide. From $739 million in Q3'24 to $692 million in Q4'24, then $595 million in Q1'25—and now $439 million. Policy Shifts and EV Competition Add Pressure Last month, President Trump's tax and spending bill officially scrapped the penalties for automakers failing to meet Corporate Average Fuel Economy (CAFE) standards. That's a game-changer. Automakers who previously bought credits from Tesla to avoid hefty fines—over $1.1 billion worth from 2011 to 2020—now have no reason to do so. The penalty is effectively gone. That removes the key incentive behind Tesla's regulatory credit windfall. And it couldn't come at a worse time. Tesla is already facing a slump in deliveries and profits. The company recently posted two straight quarters of delivery declines. Without credit sales to somewhat plug the gap, Tesla's core business will face more pressure. Some automakers may still have long-term credit purchase agreements with Tesla, but those contracts may be renegotiated—or even canceled—early. In fact, the credit revenues could disappear by next year. And it's not just the policy shift. Many legacy automakers like General Motors GM, Ford F and Stellantis STLA are also shifting their gears to electric. As they scale up their EV output and reduce emissions, they need fewer regulatory credits. A Fading Lifeline Tesla Can't Ignore While headlines are busy tracking CEO Elon Musk's political battles or the loss of $7,500 EV buyer tax credits, this regulatory credit risk of Tesla has not gotten much attention. But the risk is real—and growing. Regulatory credits have quietly propped up Tesla's profits for years. But the safety net could be vanishing. Unless Tesla can make up for the loss with stronger sales, tighter cost controls or big wins in robotaxis, the road ahead could get bumpier. The Zacks Rundown for Tesla Shares of Tesla have lost around 20% over the past six months compared with the industry's decline of 17%. Meanwhile, shares of Ford and General Motors are up 8% and 10%, respectively, while Stellantis is down 32% during the same timeframe. Image Source: Zacks Investment Research From a valuation standpoint, TSLA trades at a forward price-to-sales ratio of 9.5, way above the industry. It carries a Value Score of D. Meanwhile, General Motors trades at a forward sales multiple of 0.28, Ford at 0.27 and Stellantis at 0.14. Image Source: Zacks Investment Research See how the Zacks Consensus Estimate for TSLA's earnings has been revised over the past 90 days. Tesla stock currently carries a Zacks Rank #4 (Sell). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here Zacks Names #1 Semiconductor Stock This under-the-radar company specializes in semiconductor products that titans like NVIDIA don't build. It's uniquely positioned to take advantage of the next growth stage of this market. And it's just beginning to enter the spotlight, which is exactly where you want to be. With strong earnings growth and an expanding customer base, it's positioned to feed the rampant demand for Artificial Intelligence, Machine Learning, and Internet of Things. Global semiconductor manufacturing is projected to explode from $452 billion in 2021 to $971 billion by 2028. See This Stock Now for Free >> Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Ford Motor Company (F): Free Stock Analysis Report General Motors Company (GM): Free Stock Analysis Report Tesla, Inc. (TSLA): Free Stock Analysis Report Stellantis N.V. (STLA): Free Stock Analysis Report
CNN
22-07-2025
- Automotive
- CNN
The big problem for Tesla that isn't getting much attention
For years, Tesla has earned billions of dollars from its competitors just for selling electric vehicles. But that windfall is about to go away, just when the company may need it the most. Regulatory credit sales have been a huge source of revenue for the automaker, which currently faces a sales and profit slump. Legacy automakers purchase credits from Tesla to keep selling gas-burning cars that would otherwise violate emission regulations and cost them a fine. But the Republican tax and spending bill passed earlier this month removes that financial penalty for automakers, meaning they will no longer have any incentive to purchase these regulatory credits from Tesla. The loss of such credits hasn't gotten nearly as much attention as the blowback to Tesla CEO Elon Musk's alliance, then battle, with President Donald Trump or the elimination of the $7,500 tax credits for EV buyers. But removing those regulatory credits from Tesla's balance sheet could spell disaster for the company's financial future, perhaps even resulting in ongoing losses. According to a recent note from analysts at William Blair and Co., the automakers 'that fail to meet standards no longer incur fines, eliminating market demand for Tesla's credits.' The analysts expect Tesla's regulatory credit revenue to fall by 75% next year and disappear completely by 2027. That will 'result in a direct hit to profitability (for Tesla),' the note said. Tesla did not respond to a CNN's request for comment on the change in regulatory credit sales. Until now, the US — like many governments — has had a credit system to incentivize auto companies to meet environmental regulations. It awarded credits to auto companies that met emissions standards and imposed financial penalties on those that didn't. For automakers that primarily sell gasoline-powered cars, they could buy credits from automakers that sell low-emission vehicles, like Tesla, to avoid fines they otherwise would have to pay. For Tesla, regulatory credit sales alone have brought in $10.6 billion since 2019. There are some quarters, like earlier this year, where credit sales exceeded the company's total net income — meaning the company would have lost money without them. And early in its history, when Tesla was still ramping up production of electric cars, the regulatory credits were crucial for keeping the lights on during a severe cash crunch. 'These regulatory credit sales are the reason that Tesla exists today,' said analyst Gordon Johnson, one of the harshest critics of Tesla on Wall Street. For most of the last four years, the company has reported net income beyond its regulatory credit sales, even as the credits themselves brought in billions of dollars. But its profit margins have been getting thinner after peaking in early 2022, making the credit sales more important. But the loss of the credit sales is just one of many problems at Tesla. The company reported a record drop in sales in its last two quarters due to increased competition for EVs and backlash from some buyers to CEO Elon Musk's political activities. Tesla reported a plunge in profitability in the first quarter of this year and is forecast to report another steep drop in second-quarter results due on Wednesday. The credits sales might not end immediately if legacy automakers honor their long-term contracts with Tesla. But Johnson says that some automakers may try to get out of those credit purchase contracts early. He predicts that Tesla's credit sales could vanish as quickly as the third quarter of this year or the start of 2026. That, he said, could cause Tesla to start reporting quarterly net losses once again. 'Without regulatory credit sales, Tesla loses money in its core business,' he said.
