Page 143 - MS Year in Review 2020

This past week, Tesla was added to the S & P 500. Why? As pundit Jim Cramer

said: They couldn’t figure out how to avoid it.

What happened? Was its Madness, Market Myopia or Machiavellian Machinations?

Or all of the above? Let’s look at each alternative.

MARKET MADNESS

The madness of crowds has been well documented throughout history. Market
madness has led to a variety of spectacular but unsustainable crazes, including the
Great Tulip crazy of the seventeenth century; Britain’s “South Sea Bubble” in the
eighteenth century; the Great Railroad boom of the nineteenth century which ends

in a bust; and, of course, the Grand Daddy of them all—the great stock craze of the
early 20th century that ended with the crash of ’29. 124

Market Madness, S & P Myopia and Tesla: The Illusion of Profitability

With a nod to Gertrude Stein, Profit is not Profit is not Profit! While
Tesla technically achieved a profit as measured under “GAAP,” the S & P

Committee surely must have understood (what the many in the general public and
market does not) that Tesla’s profit while legal was merely an artifact of its receipt
of payments by other automakers (called “regulatory credit revenue”) as a form

of “carbon tax” on their operations. Specifically, “Tesla reported profitable second-
quarter GAAP results, and adjusted diluted EPS of $2.18 rose significantly from the

prior year’s quarterly loss of $1.12. We calculate Tesla had a pretax loss of
$278 million excluding $428 million of regulatory credit revenue.” 125 This
is revenue not from operations, a governmental mandated subsidy for

electric vehicles.

When these payments will cease Tesla’s earnings will be reduced significantly.
Currently they would be “negative earnings” (that is, a loss!). Accordingly, one can

124 See John Kennethc Galbreath, “A Short History of Financial Euphoria,” Viking Penguin, 1993.
125 Analyst Note David Whiston, CFA, CPA, CFE, Analyst, 22 July 2020. Morningstar Equity Analyst
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