A Closer Look At Tesla’s Leasing Business

TSLA: Tesla logo

Leasing could represent a large and lucrative opportunity for electric vehicle behemoth Tesla in the long run. Leases are quite attractive to customers, as they help to bring down monthly payments compared to a loan, besides giving them more flexibility to trade up vehicles. Moreover, Tesla’s electric vehicles may be much more suitable for leasing compared to gasoline vehicles, since they see less wear and tear and maintenance, and typically see lower depreciation and better residual values. Despite the advantages, just about 7% of all Teslas delivered in Q3 2021 were leased, compared to an average of over 25% of all new U.S. vehicles which are bought on lease. For an overview of Tesla’s leasing business and how it impacts its finances, see our analysis on How Tesla’s Expanding Leasing Business Reflects On Its Financials. Parts of the analysis are summarized below.

Tesla’s lease sales as a percentage of its overall deliveries grew from 2.2% in Q1’19 to over 9% in Q3’19 as the company made its Model 3 available on its leasing program.  However, the number declined to about 7% as of Q3 2021, likely due to lower interest rates which make buying a vehicle a bit more appealing compared to leasing. Tesla’s lease revenues – which comprise monthly lease payments – grew about 45% year-over-year to about $385 million in Q3’21, or to just about 3% of Tesla’s total automotive revenues for the quarter. However, leases have a slightly more pronounced impact on Tesla’s bottom line, as lease gross margins remain well ahead of overall automotive gross margins (39% versus about 30% in Q3 2021). This is 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. See our update below from 2020 for additional details on how Tesla’s leasing business works.

[Updated 10/6/2020] Why Tesla Should Double Down On Leasing

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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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 Returns Dec 2021
MTD [1]
YTD [1]
Total [2]
 TSLA Return -18% 43% 2261%
 S&P 500 Return -2% 22% 105%
 Trefis MS Portfolio Return -2% 41% 281%

[1] Month-to-date and year-to-date as of 12/7/2021
[2] Cumulative total returns since 2017

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