Why Tesla Should Double Down On Leasing

Vehicle leasing could represent a large and lucrative opportunity for Tesla in the long-run. Just about 1 in 20 Teslas delivered in Q2 2020 were leased, compared to about 1 in 4 vehicles in the U.S. which are leased, giving the company a lot of room to scale up. Tesla’s leases are also likely to be more lucrative for the company, as its leases are more expensive compared to rivals, and the company’s vehicles also hold higher residual value. Below is a bit more about where Tesla’s leasing business stands and how it impacts Tesla’s financials. View our interactive dashboard analysis How Tesla’s Expanding Leasing Business Reflects On Its Financials

Tesla’s Leasing Business

Leases help to bring down the upfront cost of owning a vehicle and come with tax benefits. Monthly lease payments are also typically lower than loan payments.  Tesla’s Lease Sales as % of Vehicle Deliveries have grown from 3% in Q3’18 to over 9% in Q3’19, as Model 3 was added to the company’s leasing program. However, the number declined to about 5% as of Q2 2020, likely due to lower interest rates which could be making people opt for financing over leasing. That said, if interest rates remain low, Tesla could cut lease rates, making its leasing program more attractive. The recent addition of the Model Y SUV to Tesla’s leasing program could also help Tesla lease more vehicles.

How Leases Impact Tesla’s Automotive Revenues

Tesla only recognizes the monthly operating lease payments when it leases a vehicle, versus recognizing the full selling price for vehicles that are financed or bought outright. However, lease revenues are much more stable, as they include payments from vehicles leased in prior periods as well. Tesla’s Lease Revenues grew about 30% year-over-year to about $268 million in Q2’20, despite the fact that the number of leased vehicles over the quarter declined. Tesla had about 55k vehicles under lease as of Q2’20, up from 39k vehicles in the year-ago quarter.

How Leases Impact Tesla’s Margins

Tesla’s Gross Margins for Leases stood at 45%, well ahead of Automotive Sales Gross Margins of 24% in Q2 2020. Gross Margins for leases are higher likely due to the fact that Tesla keeps the vehicles on its balance sheet with the Cost of Sales on leases primarily relating to the depreciation of the leased asset. It’s possible that some expenses are being excluded compared to outright sales, which account for all manufacturing-related costs.

Tesla’s Electric Vehicles Are Great For Leasing

Residual values on Teslas hold up far better than other vehicles. For example, per data from iSeeCars, a Tesla Model 3 lost just about 5% of its value within one year, versus about 14% for a Honda Accord and a whopping 38% for a BMW 3 Series. A similar trend can be seen if we compare the Model S and X with competing luxury vehicles. This means that at the end of a lease, Tesla still has a valuable asset that can be sold or used for the company’s planned Robo taxi fleet. This is likely due to the lower wear and tear associated with electric vehicles, Tesla’s periodic software updates – which keep adding features, and the low running costs. The higher residuals and longer life could also give Tesla the flexibility to cut lease payments further, making it more attractive to customers.

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