Tesla’s Model S: Is The Cheap Route Real?

On Twitter last week, Tesla Motors (NASDAQ:TSLA) CEO Elon Musk said the he was “putting his money where his mouth was,” and he was right. But it wasn’t in the sense that people were expecting, evidently. Tesla unveiled its new financing plan for the Model S, its flagship sedan. While the program offers some exceptional upsides and is truly a new way of financing a vehicle, the way that the company packaged it left a bit desired, and raised concerns and even scorn among observers and investors.

Shares sank like a stone through Wednesday morning trading, down over 7 percent, as investors reacted to what was considered a fairly anti-climactic announcement, following a 16 percent surge on Monday.

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The Model S by any standards is not a “cheap” car — and nor should it be, as it has been flaunted as a luxury car since it was still under development. Base models start at upwards of $70,000, and if you opt for the performance line with options and a more powerful battery pack, you’ll quickly be shelling out around $100,000 for a new car. To make the vehicle more accessible, Tesla joined forces with Wells Fargo (NYSE:WFC) and U.S. Bancorp to offer a new financing structure that draws aspects from leasing and a traditional auto financing agreement to create a sort of hybrid (pun intended) option to lure prospective buyers.

Let’s take a look at the positive aspects first. To start, Tesla requires a 10 percent down payment on the new car. For the base model, this would amount to roughly $7,000, a cost which is offset by the $7,500 tax credit that Tesla customers are entitled to for buying an electric car (the credit can amount to as much as $15,000 if you live in West Virginia). After factoring in fuel costs and maintenance, Musk asserts that a new Model S would cost the user about $500 per month — but more on that later.

Customers are given the option of a five year or a seven year loan — this is where Musk’s claim about money comes into play. After three years in either scenario, the user has the right — not the obligation, like a traditional lease — to sell the car back to the company, for a guaranteed resale value. Musk even went as far as telling people he’d sink his own money into this plan to ensure customers could walk away with no additional costs after three years. The buyback price is pegged to a Mercedes-Benz S-Class sedan, he said. Mercedes-Benz parent Daimler is a Tesla stakeholder. Kelley Blue Book estimates that the residual on a 2013 Mercedes S550 sedan is 47 percent of its $95,905 list price, or a little over $45,000.

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“It’s a great peace of mind play, and if the claims match the reality, then this is completely different from any other financing model in the industry,” said JD Rucker of KPA Automotive. “In essence, you’re buying half the car much in the way a lease works but still gaining the benefits of ownership. They’re banking on low mileage, and I’m sure there’s fine print but it sounds like a ‘best of both worlds’ financing concept.”

However, closer examination reveals that the base monthly price provided — $500 — was provided on a foundation of “liberally employed” assertions, as JPMorgan (NYSE:JPM) said in a note.

Firstly — and not surprisingly — that number comes from the base model with a 60 kWh battery pack. It also takes into account that the buyer is in California, which offers a $10,000 environmental tax credit, and values their time at $100 per hour — time accounted for while pumping gas for an average of one hour per month, paying an average of $5.00 per gallon, if you’re driving a car that averages 19 miles per gallon, are using the Model S for business purposes (and can therefore write it off as a business expense, at least partially), and will be driving the car for 15,000 miles or less per year.

That’s a lot of assumptions, which media has been quick to jump on. The adjusted number, for the average citizen, lies more closely to $1,200 per month — more than double Tesla’s best-case scenario, and higher still than competing luxury car makers like BMW or Audi.

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“Our early analysis suggests that while the program is likely incrementally positive, it may perhaps not prove a game- changer in terms of demand,” Ryan Brinkman, a New York-based analyst for JPMorgan, wrote in an investor note on Wednesday.

Although over hyped, Tesla’s announcement is only the beginning of its adventure — after all, the company only recently got its production lines operating at near-full capacity, and it still has numerous bugs and kinks to work out. Long term, Tesla has plans for a more affordable, mass-market vehicle. It’s with that model that this financing formula will really have a profound effect on making electric cars a more financially practical feasibility for consumers.

At 1:15 PM EST on Wednesday, Tesla’s shares were down 8.05 percent, to $40.77.

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