The value of Tesla’s new financing program

Tesla had two pretty big milestones last week. It confirmed that it was profitable based on a GAAP basis during Q1 and it released details of a new financing program that should open up the car to new buyers. Wall Street was far more impressed with the profitability news, which sent the stock soaring a quick 15 percent, than it was with the leasing program.

It’s always hard to read the tea leaves with Wall Street, but investors were likely hoping for a bigger announcement than a lease program, like perhaps a new fundraising round or a new vehicle announcement or the most immediate need—an increase in production capacity. The company lost about 7 percent of value the day after the lease announcement.

The new financing program is an incremental step is fueling demand for the Model S and making electric cars leasable. I actually expect that Tesla’s program could help other electric vehicle makers down the line by showing that banks can run lease programs for EVs and make money. Musk opened the call with reporters by addressing the issue of residual value:

“A lot of people think, what’s going to happen to an electric car, is the battery going to depreciate much faster than they expect? There’s a lot of that uncertainty.”

There’s very little data on residual value for EVs because the market is so new and Tesla is effectively offering a hybrid lease-financing program to address these questions. After putting 10 percent down, a buyer then gets a 63 month loan term for the car. Tesla has said that given the 7,500 federal tax credit buyers get for purchasing an EV, that the financing works out to zero money down, though a buyer waits 3 to 12 months for that tax credit.

But the key difference is that after 36 months, the owner has the right but not the obligation to sell their car back to Tesla for 43 percent of its sale value, which is the current residual value rate after 3 years of a Mercedes S550. Musk also got some PR by saying he’ll personally back Tesla’s commitment by guaranteeing the resale value with his own assets, if theoretically something were to happen to Tesla the company.

Tesla’s website argues that the net out of pocket payment is around 500-600 dollars a month, once you consider that EVs don’t use gas, have much lower maintenance costs and that one could deduct the car as a business expense. The reality is that your monthly payment will be between $1,097 and $1,483, depending on which model you choose. You’ll save about $250 a month on gas versus electricity, so it’s possible to have a net out of pocket expense of under a grand.

The lease-financing program is good and will open up the car mainly to people who just don’t want the commitment of owning a luxury car they’re not sure they’ll want in three years, which is a lot of people, not just those thinking about giving a new, sleek EV a shot. There’s currently a five month wait for a Model S and I was surprised no one on the conference call last week asked what the plan was for increasing production capacity at Tesla.

Wall Street wasn’t enamored with the leasing news because it’s not going to add to Tesla’s bottom line in 2013. It’s fairly clear Tesla will be able to sell the 20,000 units it will manufacture this year with or without the new financing program. But scaling production and improving margins at the company are ultimately what I’m waiting for. But I get it. Put a new financing program in place so that when Tesla can do both of those things, there’ll be adequate demand. One step at a time.

 

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Adam Lesser

Cleantech Curator Gigaom Research

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