Tesla, Inc. (TSLA), the maker of electric vehicles, reported fourth quarter results last month. Revenue grew by 46% year over year from $7.38 billion to $10.74 billion. The company generates the bulk of this amount, about 87% in the latest quarter, from automotive selling and leasing.

This isn't just customers buying or renting Tesla cars, though. A portion comes from regulatory credits. These are provided by various governments under various environmental regulations (e.g., zero-emission vehicles, greenhouse gas, and clean fuel), and they are based on either the number of electric vehicles the company sells or the level of emissions.

Tesla, with an all-electric vehicle lineup, receives a lot of these credits. Since these are tradable, the company sells its surplus to other automakers that don't have sufficient credits. There is very little or no cost associated with them, making this pure profit for Tesla.

  • Tesla's fourth-quarter revenue growth was strong.
  • The company generates a portion of its revenue and profit from selling regulatory credits.
  • These will disappear at some point, making it important to track.

In the fourth quarter, Tesla's revenue from regulatory credits was $401 million, which is less than 5% of its total top line. This is up from $133 million in the year-ago period but in line with the prior quarter's $397 million.

While it is not a significant portion of the company's revenue, it has greatly contributed to Tesla's income from operations, which was $575 million in the latest quarter. Management does expect its regulatory credit revenue to decline, eventually. While they didn't provide a timeline, this will happen at some point as other automakers build out their own electric and environmentally friendly cars. This would eliminate the need to purchase Tesla's surplus credits.

The Bottom Line

Investors want to see Tesla's results improve from its core operation of making and selling or leasing cars. Therefore, it is important to see how much of the company's revenue and profit is coming from selling regulatory credits.

Fortunately, the company breaks out the amount of revenue generated from selling automotive regulatory credit in its earnings press releases, making it easy to see the figure without them. Subtracting this number from Tesla's revenue and income from operations, you can compare the company's results on this basis over time. If you are looking just at Tesla's automotive operations, you can remove the regulatory credits from its automotive operating profit to see the trend over time.