Tesla has changed the auto industry’s face and is now the most talked-about automaker, given the ripple effect it is having in the industry. As a market leader on electric and autonomous cars, the tech giant has turned its first full year profitability, conversely become a firm favorite among auto-focused investors.
A 700% plus rally in 2020 at the height of the COVID-19 pandemic attest to the love the company continues to receive in the markets. Strengthened investor confidence stems from a growing belief about its long-term prospects and growth metrics in the auto industry.
An impressive track record of profitability in recent quarters also affirms the company is generating a significant amount of money to distribute some to investors in earnings per share. Amid the impressive track record, have you ever wondered how Tesla makes its money?
Tesla posted its first full-year profit in 2020, marking a significant milestone after years of losses. As the year came to a close, the fourth quarter marked the sixth consecutive quarter of profitability, an important milestone as the global economy was struggling amid the COVID-19 pandemic.
The company posted a net income of $862 million in 2020, up from a net loss of $775 million reported the previous year. Likewise, Tesla generated $31.5 billion in sales in the year.
Tesla makes its money from two main business segments
- Energy Generation and Storage
The automotive segment is the biggest segment and at the heart of the tech giant’s core business. The segment is involved in the development of autonomous electric cars. It accounts for the biggest share of the total amount of money that Tesla generates each quarter.
Of the total $31.5 billion in sales that Tesla generated in 2020, the automotive segment accounted for about 94%. Likewise, the segment accounted for about 100% of the total gross profit. The segment alone posted a gross profit of $6.6 billion, up 70.5% from a year ago. It also generated $29.5 billion in sales, a 28.2% year over year increase.
The automotive segment remains a key driver of the total amount of money that Tesla generates, partly because of an increase in the total number of electric cars that the company delivered. In the fourth quarter of 2020, Tesla produced and delivered about 181,000 vehicles. For the full year, the company produced about 510,000 cars and delivered 500,000.
Energy Generation and Storage
Energy generation and storage accounts for a small percentage of the total amount of money that Tesla generates each quarter. The segment is involved in the design, manufacturing, installation, sales, and leasing of solar energy generation accessories.
The segment is also involved in the development of energy storage devices such as batteries used in electric cars as well as in combination with solar panels.
In 2020, the segment accounted for about 6% of the total sales at about $2 billion. Revenues in the segment were up 30% year over year, affirming strong demand for Tesla’s solar energy accessories. Similarly, the segment posted a 90% year over year increase in gross profit at $18 million.
Buoyed by the profitability trajectory in the two business segments, Tesla has updated its investment policy as it looks to develop new revenue-generating streams. The company has started investing a good chunk of the amount of cash reserves not needed to maintain adequate operating liquidity.
For starters, Tesla has invested close to $1.5 billion of its free cash flow in Bitcoin. The company joins a number of mainstream companies that have taken note of Bitcoin’s meteoric rise and looking to profit from its massive price gains. Its investment in the cryptocurrency has already generated more than $500 million in profit, close to the total amount of net income it generated the entire 2020 from the auto and energy storage business.
In addition, Chief executive Officer, Elon Musk, has already reiterated plans to invest in gold, another alternative investment that could help strengthen the company’s bottom line.
Tesla is in a phase of robust growth, going by the milestone achieved in 2020. Revenue growth, leading to a sixth consecutive quarter of profitability, affirms a company firing on all angles. Having delivered over 500,000 in 2020, Tesla is on course to deliver between 840,000 and 1 million cars in 2020 based on its factories’ maximum capacity.
Increased car deliveries should allow Tesla to generate more money than the $31.5 billion generated in 2020. Similarly, the automotive segments should continue to account for a good chunk of the company’s total cash, given the strong demand for electric and autonomous cars worldwide.
The energy storage segment should also be a key driver of the bottom line going by the ongoing transition to green energy and strong demand for energy storage devices.
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