How Leasing Impacts Tesla’s Financials

The Trefis Team at Forbes has a great piece on Tesla’s fast-growing leasing business:

While the higher mix of leases is impacting Tesla’s Revenue Growth, it is accretive to the company’s Gross Margins. Below, we take a look at how Tesla’s Leasing business is faring and how it impacts the company’s financials.

Forbes

Oh, I’ve been wondering about this. Leases accounted for 9% of deliveries in Q3 2019, up from 3% in the same 2018 quarter.

According to Forbes, a Tesla that is leased reduces Tesla’s revenue but has much fatter Gross Margins.

As Tesla only recognizes the monthly operating lease payments under revenues when it leases a vehicle, the higher mix of leases is impacting the company’s Revenue Growth to an extent.

For instance, in Q3’19 the company delivered about 9.1k vehicles under leases. If these were outright sales, the company would have booked over $500 million in revenues. However, overall lease revenues for the quarter were only about $220 million.

Forbes

Tesla lost about $260 million in revenue in Q3 2019 by offering leases. But there is an upside:

Lease Gross Margins are well ahead of Automotive Sales Gross Margins (47% vs. 22% in Q3’19) and the higher mix of Leases are helping Tesla’s overall Margins.

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.

However, Tesla could take writedowns at a later date if the residual value it realizes on the leased vehicles is less than the book value.

Forbes

Although leases impact revenue, gross margins are more than double what Tesla gets through direct sales. Although Tesla revenue appears slightly less in the short term, in the long term they should generate more earnings overall from the transaction.

The big risk is that they might have to take a writedown on the cars if the residual value is less than realized. But if the cars can really be used as Robotaxis (or even just have advanced driver assistance) that shouldn’t be a problem.

Tesla’s Leases are generally more expensive compared to buying outright and are also higher than rival manufacturers’ leases.

As of May, a lease on a Model 3 had an APR (annual percentage rate ) of about 6% compared to under 4% offered by BMW Financial Services.

For instance, under a lease, a customer would pay close a total of about $22k to lease a Standard Range+ Model 3 over 3 years. In comparison, a new vehicle costs about $39k after federal tax rebates.

Forbes

This is interesting news. It suggests that Tesla could stimulate demand with lower Model 3 lease prices in the future if they can manage to match BMW’s financing offers in the future.

As some customers also prefer to lease vehicles for tax purposes, the program is also likely to be helping Tesla cater to a broader audience.

Forbes

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