Tesla: The Model 3 Lease Arrives

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About: Tesla, Inc. (TSLA)
by: Tokyo Picker
Summary

Tesla has finally started to offer the Model 3 on lease.

The lease seems extraordinarily expensive.

Is this really about leasing?

Late in the evening of April 11, Tesla (TSLA) finally started to offer leases in the US on the Model 3. Many people, on both sides of the Tesla debate, have been waiting for leasing. Bulls think it will substantially increase demand, because Model 3 customers (unlike S and X customers) will often not be able to handle an all-cash deal. Bears believe that the more the Model 3 competes on a level playing field with competitively priced vehicles, the more obvious the lack of demand will become.

However, when we look at the details of the leases offered, it is difficult to believe that this is a serious attempt to raise revenue or increase volumes, and it seems that both bulls and bears will thus be disappointed.

How does the Lease Pricing Look?

I have recently (December) leased a new 2019 Volvo XC40 (under Volvo's (OTCPK:VOLVY) innovative new subscription program), and so I offer to readers a comparison in order to analyze the relative affordability:

Tesla lease comparison

As you can see, the Volvo (a highly optioned T5 Momentum AWD) is approximately the same cash price as the Tesla M3 SR+. When considered on a lease miles per dollar basis, the Volvo is superior to both Tesla models shown even without considering that under the Volvo program, it pays for all insurance and maintenance, whereas Tesla lessees must look after themselves. As a further check on market pricing, BMW (OTCPK:BMWYY) tells us that a lease for its 330i (slightly more expensive than the M3 SR+) is only $449 per month with $3,925 up-front and for its X6 sDrive35i (comparably priced to the M3 P) is only $599 per month with $4,425 up-front (both three years, 10,000 miles annually).

So who would enter into a lease on such terms, especially given the lack of a purchase option? But maybe the lack of a purchase option is more important than the fact of the lease. Tesla explains the lack of a purchase option as follows: "customers who choose leasing over owning will not have the option to purchase their car at the end of the lease, because with full autonomy coming in the future via an over-the-air software update, we plan to use those vehicles in the Tesla ride-hailing network." So is the real point of this initiative not to get leasing customers (who Musk has already told us are bad for the financials).

Musk on M3 leases If you can't sell cars, build networks

It seems the real point of this announcement is to refocus attention on the Tesla Mobility story - the hope that Tesla's real value is not as an auto-manufacturer but as an EV Uber with autonomous cars. Now, Elon can say, I have a plan for the car fleet - the ex-lease Model 3s. All that is needed next is the autonomous driving. Not coincidentally, Tesla has a major presentation on this scheduled for April 22. Combining this leasing announcement and the autonomous driving presentation may distract investors from the scheduled Q1 financial release on April 24.

Tesla schedule

Assessing Tesla's chances of actually building an autonomous ride hailing network is well beyond my competence. My background is financial, and not automotive. I refer readers to real experts, such as Paulo Santos, who has provided excellent recent coverage here. My point today is the conditions on which Tesla leases are offered seem less designed to attract lessees, and more designed to change the narrative about the stock price - to assisting in moving discussion away from the production problems and the lack of demand and toward the glorious future as an Uber-with-no-drivers.

Conclusion

Investors should not expect any substantial effect on Tesla's financials from this leasing initiative. I don't expect a large take-up of the offer. Rather they should view this as part of an effort to redirect the Tesla story. Is that redirection an honest attempt to illuminate the future that Musk & Co. see for Tesla, or is it a desperate attempt to distract from Tesla's current problems and the forthcoming likely-to-be-terrible Q1 financials? Investors must use their own judgment.

I will however offer one final thought to readers. The announcement from Tesla was not only about leasing, but it was also about the SR which would now be offered as an SR+ with only software limitation. In other words, you can buy the promised $35k (plus various fees) version of Model 3 and it will be just the same car as an SR+ save for a limitation which can be erased with a future payment. But the cost to Tesla of producing the car is the same whether you buy the SR version or the SR+. There are two possible explanations for this. One is that demand for the SR+ in North America has evaporated to such an extent that it is prepared to sell the same car (from Tesla's point of view) for a lower margin and the hope of a future upgrade fee. The second (my favorite) is that it has finally accepted that it cannot sell the SR at a profit and it is hoping just to sell a few to say that it complied with the promise, but not enough to make the losses substantially worse. I think this is supported by the fact that you cannot buy the SR online - you have to call Tesla or go into one of its remaining stores to make a purchase. Readers are invited to give their own views in the comments below.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.