Tesla Motors Inc: Analyzing The Impact Of Its Lease Program

Tesla Motors Inc: Analyzing The Impact Of Its Lease Program
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Tesla Motors Inc (NASDAQ:TSLA) shares plunged more than 11% when the company reported its first quarter results on May 7. Deutsche Bank analysts Rod Lache and Mike Levin believe multiple factors contributed to the decline. Some view it as a correction from outperformance in the weeks leading up to the earnings release. Others were expecting the company’s results to significantly exceed expectations, as Tesla has done in the past few quarters. And then there were some who were surprised (or shocked) by the electric vehicle maker’s increase in operating expenses.

Leasing program a brilliant move from Tesla

Tesla Motors Inc (NASDAQ:TSLA) announced that it will raise its R&D expenses by 30% QoQ in the current quarter, compared to 17% sequential increase in the March quarter. The selling, general and administrative expenses are likely to jump 15% from Q1 to Q2. The San Francisco-based company announced that it will start a leasing program for small businesses. However, it will be temporary move until big financial institutions grow comfortable with residual value of Model S cars.

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Deutsche Bank says the leasing program is a brilliant move from Tesla Motors Inc (NASDAQ:TSLA) to better utilize its cash on the balance sheet rather than keeping it until it is used for expansion. However, there will be a dilutive impact in the short-term because the company will amortize earnings from leased vehicles over the life of the leases (usually 36-48 months) instead of an immediate recognition of sale. The research firm has adjusted its FY14 and FY15 estimates to reflect the new leasing program.

How Tesla’s lease program works

Here’s how the lease program would work. When a lease originates, Tesla Motors Inc (NASDAQ:TSLA) will start recognizing revenue based on the difference between the sale price and the assumed residual value of the vehicle. For instance, if a leased Model S is valued at $100,000 and the assumed residual value is $50,000, and the lease period is 36 months, Tesla will recognize $1,388 plus interest a month or $16,667 plus interest a year.


Notably, monthly gross profit will be equal to the gross margin when the lease originated. After termination of the lease, the company may sell the used car (or sell it to the lessee) to gain the $50,000 residual value. Lache and Levin don’t expect the lease program to have any serious impact on the long-term liquidity.

Deutsche Bank lowers its estimates for Tesla

Tesla Motors Inc (NASDAQ:TSLA) said that it will lease 200 Model S cars during the April-June quarter, and about 500-700 vehicles in the third and fourth quarters. It’s a limited program aimed at small businesses. So, Deutsche Bank forecasts that the lease volume will remain steady at 700 units per quarter. Tesla subtracts lease volume from deliveries, and then each lease is amortized over a 36-48 month term.


Deutsche Bank has lowered its 2014 EPS guidance from $1.15 to $0.91, revenues estimate from $3.78 billion to $3.68 billion, and profit estimate from $1 billion to $968 million. For FY2015, the research firm forecasts $5.12 billion in revenues, $1.59 billion in profits and $2.65 in earnings per share.

Tesla Motors Inc (NASDAQ:TSLA) shares plunged 2.32% to $186.19 at 12:19 PM EDT on Thursday.

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