Page 85 - MS Year in Review 2020

highest score and “1” is the lowest score.” The negatives, risk factors and

questions result in a score of 2 points less than the maximum of “5.”

Acquisition and Development of Resources Required to Operate the Firm

Positives:

 The demand for Tesla stock (regardless of its actual value) has created a

valuable (lower cost) currency for growth. The greater the demand for
Tesla stock, the lower the cost to Tesla of equity capital.

Negatives and Risk Factors:

 Although there is currently very strong demand for Tesla stock, if the
company were to experience operating or market demand problems, this

advantage could reverse.
 The “E” (Earnings) component of the Tesla’s “PE ratio” includes 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

67
regulatory credit revenue.” This is revenue not from operations, a
governmental mandated subsidy for electric vehicles.
 If US governmental policy were to change, and these payments were to be

either reduced or ceased, Tesla’s earnings would be reduced significantly.
Currently they would be negative earnings (that is, a loss!). One can
argue that this is not “real” earnings.

 If the stock buying public changed its perspective and did not give Tesla
“credit” for “regulatory credit revenue,” its stock price might decline
precipitously.

67 Analyst Note David Whiston, CFA, CPA, CFE, Analyst, 22 July 2020. Morningstar Equity Analyst
Report | Report as of 23 Jul 2020 03:20, UTC | Page 1 of 15

84
© Management Systems Consulting Corporation, 2020. All rights reserved