Tesla (NASDAQ:TSLA) is a car company worth over $800 billion that has never turned a profit selling cars. Despite a cult following and intense brand loyalty, Tesla has been unable to wring any profits out of the half a million cars it now sells annually.

To be clear, Tesla did report a profit for 2020, under generally accepted accounting principles (GAAP), marking the company's first full year of profitability. But that profit did not come from the core business of manufacturing cars. Tesla booked a whopping $1.58 billion of revenue from selling regulatory credits last year, more than the previous three years combined. Tesla's net income of $721 million in 2020 turns into a substantial loss if those regulatory credit sales are backed out.

A Tesla Model 3.

Image source: Tesla.

A regulatory bonanza

Certain U.S. states award regulatory credits to automakers for selling electric vehicles. Automakers must acquire a minimum number of these credits to comply with regulatory requirements. These credits can be bought and sold, so an automaker that doesn't sell enough electric vehicles can buy credits from other automakers that do.

This regulatory credit system is an attempt by governments to encourage electric vehicle production and reduce emissions. It's ended up essentially subsidizing Tesla's money-losing car operation. Since Tesla only produces electric cars, it's able to sell reams of credits to other automakers that are unwilling or unable to produce enough electric cars.

It should be obvious that this situation is not going to last forever. Automakers are aggressively ramping up their electric vehicle efforts, and there's little reason to believe that Tesla has any real advantage beyond its brand. One example: General Motors is pouring billions into its electric vehicle efforts, with plans for dozens of models over the next few years. GM also recently unveiled a new commercial electric vehicle brand, and it already has delivery giant FedEx as a customer.

This regulatory credit windfall for Tesla will start to vanish as other automakers ramp up their electric vehicle sales. Tesla will then need to figure out how to profitably manufacture cars.

An extreme valuation

Tesla's valuation of more than $800 billion is quadruple that of Toyota. Toyota sold nearly 10 million cars in 2020, compared to half a million for Tesla.

I would argue that it probably won't matter how well Tesla does over the coming years because the valuation is so extreme that a positive result for investors would require absolutely everything to go right. The company can do well, even very well, and the stock could still fall apart.

Here's an example from the dot-com bubble. Cisco Systems stock hit an all-time high around $80 in early 2000. The networking hardware company was valued at nearly $550 billion at its peak.

Today, Cisco is the dominant provider of enterprise networking hardware. The company's share of the enterprise switch market hovers around 50% despite no shortage of low-cost competition. Cisco's revenue has soared from about $19 billion in 2000 to nearly $50 billion today. Net income has shot up from $2.7 billion to over $11 billion. Cisco the company has been an unquestionable success story.

Cisco the stock, on the other hand, has been an unmitigated disaster. If you bought Cisco stock at its peak, you're down over 40% more than 20 years later. The company is worth around $200 billion today. You were right about the company, but very wrong about the stock.

Tesla the company doing well in the long run does not in any way guarantee that Tesla the stock does well. You can be right about Tesla becoming a top automaker and still lose your shirt investing in the stock. Even if Tesla does wean itself off regulatory credits and starts manufacturing millions of cars annually at a profit, the valuation is so deep into the stratosphere that it may not even matter.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.