Tesla’s Strong Financial Position Allows Freedom To Expand Leasing

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Captured from Tesla’s Q2 2020 Shareholder Letter

Tesla has always been cautious about leasing its vehicles. This is in stark contrast to other luxury auto companies (like BMW or Jaguar) that use low lease rates to get folks to “stretch” up to their products with a deceptively low monthly cost. (Unfortunately, the fuel and maintenance costs of these luxury brands usually make the cars a lot more expensive than vehicles from mainstream companies like Ford or Toyota.)

Tesla had to limit the number of cars it allowed to be leased because accounting rules only let it recognize revenue for the car as they received it, vastly different than selling a car and recognizing all of the revenue on the day of the sale. For a struggling automaker than has needed to frequently raise cash to develop cars, batteries, and solar technology — and then build large manufacturing facilities to produce their innovative products at scale — it was important for Tesla to show revenue growing quickly and losses as small as possible.

What Has Changed?

Now that Tesla has shown it can be consistently profitable, even under unprecedented economic conditions like today’s, and it has shown it can be cash flow positive consistently, even when building several of the largest factories in the world simultaneously, it seems unlikely Tesla will need to sell more stock or issue more bonds anytime soon. Even if Tesla did need to secure financing (maybe I should have worded it differently), it is a darling of the Nasdaq and wouldn’t have any trouble doing so.

For many companies, a mission is something its executives came up with because a consultant told them they should have one. Tesla is the opposite. Tesla wouldn’t even exist if it wasn’t for the mission. It’s the company’s “raison d’etre,” or “reason for being.” Accelerating the world’s transition to sustainable energy means getting more cars in people’s hands. When Full Self Driving is working and approved, that will mean operating robotaxis, but for now it means selling and leasing more vehicles. So, if Tesla can now provide cars the way people want to acquire them, it will.

Last year, this article found that over 32% of cars are leased, while in the luxury subcompact market, it is 64%. I wrote a few days ago about Tesla offering Model Y leases for the first time. Tesla’s advanced design, batteries that hold up well over time, and over-the-air updates that make an old car get most of the features of the newest models are some of the reasons Tesla cars hold their value better than other cars. If Tesla wanted to be more aggressive (and I think it will once its Texas Gigafactory comes online), it has ample room to lower its lease rates, since the two factors in the cost of a lease are financing costs (which should be very low for a popular and profitable automaker in a time with unprecedented low interest rates) and depreciation costs (which are the lowest in the industry, as I mentioned before).

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Paul Fosse

I have been a software engineer for over 30 years, first developing EDI software, then developing data warehouse systems. Along the way, I've also had the chance to help start a software consulting firm and do portfolio management. In 2010, I took an interest in electric cars because gas was getting expensive. In 2015, I started reading CleanTechnica and took an interest in solar, mainly because it was a threat to my oil and gas investments. Follow me on Twitter @atj721 Tesla investor. Tesla referral code: https://ts.la/paul92237

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