How Tesla revenue is affected by non-ZEV credit

Tesla CEO Elon Musk.Rich Pedroncelli / Associated Press

• Tesla sold a large number of ZEV and non-ZEV credits in its profitable third quarter.
• Tesla earns these credits because it sells only all-electric vehicles.
• Tesla has sold credits every year to automakers who fail to meet regulatory stipulations.

Tesla blew away expectations within the third quarter, posting a significant profit on revenue of nearly $7 billion.

Of course, because Tesla reports officially to the Securities and Exchange Commission after it dispatches its usual earnings letter to investors, there was bound to be some follow-up scrutiny.

As with Tesla’s previous profitable quarter — Q3 of 2016 — analysts fixated on something outside the usual business of selling cars.

They’re called “non-ZEV” credits, and Tesla sold $137 million for the quarter. These credits are earned by Tesla outside the Zero Emissions Vehicle regime that’s followed by California and nine other states. But like ZEV credits, Tesla can sell them at any time, and automakers who don’t produce enough vehicles to meet regulatory requirements have to buy them.

Tesla bear Colin Langan at UBS — he has a $190 price target and a “sell” rating on the stock — called out the non-ZEV sale in a note published Monday. If this sounds vaguely familiar, it’s because Tesla was also called out for ZEV sales in 2016. And in truth, the non-ZEV credits aided the company’s bottom line in Q3 2018.

Read more: Tesla is getting slammed for doing something that it would be stupid to avoid

The argument, then, is that Tesla can’t really post steady profits without some “unexpected help,” as Langan wrote.

Tesla has also been a little cagey about revealing its non-ZEV sales, but that’s neither here nor there because everybody knows that the company’s greatly increased sales volumes will mean a tsunami of credits.

A bonus for selling only electric cars

The problem here is that because Tesla sells only electric vehicles, it racks up a massive number of ZEV and non-ZEV credits. They are, in a sense, a bonus payment for Tesla’s shouldering the risk of being the only all-electric carmaker in the US.

Tesla can also sell these credits whenever it wants. Consequently, they should be thought of as the opposite of unexpected. As long as they’re around, Tesla can tap them as a revenue stream.

“The help from other EV credits in Q3 highlights that underlying operations were not as strong as the original release implied, and increases our confidence that Q4 results will decline despite higher volumes,” Langan wrote. 

Fine, but even taking out credit sales, Tesla still posted a $0.55-per-share profit, according to UBS’s analysis. So even if Q4 comes in around that level, Musk never said Tesla would vaporize profits in the second half of 2018 — he just said that Tesla would stop losing money.

If you’re looking for a counter to the argument that Tesla lives and dies by ZEV and non-ZEV credits, look no farther than the huge implicit subsidy the federal gas tax represents for traditional automakers, who have been printing money for three years as sales of large pickups and SUVs have boomed. It’s currently just north of $0.18 per gallon for gasoline — and hasn’t been raised since 1993.

Get the latest Tesla stock price here.