Tesla Motors Inc.
) has introduced an automotive financing plan, partnering with
Wells Fargo & Company
), that would make its banked-upon product Model S electric sedan
more accessible to customers. Nevertheless, the stock dipped more
than 7% to $41.10 yesterday. It seems that investors didn't get
what they hoped for a week after company CEO Elon Musk's
"exciting" tweet comment.
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What is Tesla's Plan?
According to the California-based automaker, customers would need
to sign up for a 66-month, 2.95% loan for purchasing a Model S
with a price tag of $69,900. The plan relieved car buyers for
making a big down payment as U.S. Bancorp and Wells Fargo will
provide 10% down payment. The down payment would be covered by
U.S. Federal and state tax credits, ranging from $7,500 to
$15,000, for electric car buyers.
The plan also included a personal touch from Musk. The CEO
himself has guaranteed the resale value of the car, which would
be equal to the residual value percentage of the Mercedes S class
of sedans, manufactured by Germany's
), a partner of Tesla. The customers have the right but not the
obligation to sell the vehicle after 36 months as per the plan.
The company also revealed that the lease-like financing plan,
savings from using electricity instead of gasoline, depreciation
benefits and other factors would bring the monthly expenses for
owning a Model S to less than $500.
What Can Go Wrong?
Investors initially became happy right after the CEO's tweet
comments when Tesla revealed that it expects to be fully
profitable in the first quarter of the year rather than modestly
profitable due to better-than-expected sales of Model S. The news
even sent the stock to 52-week high of $46.68 on Apr 1.
The financing plan also offers significant opportunities to the
company in terms of business growth. It could boost Model S
sales, as the vehicle would become affordable to a larger
The improved sales could increase cash flow and help Tesla
increase market share. This could eventually led the company to
expand production (Tesla expects the deliveries of Model S to go
up to 20,000 this year) and invest in new technologies and
facilities. All these would ultimately reduce production costs
and boost profits.
But there are downsides. First, the plan did not appeal to
investors in a way the company has imagined. The investors simply
considered it as a conventional auto loan with a buyback option
despite its colorful packaging.
Secondly, the plan sent an ominous signal to the investors by
bringing the uncertainties and risks associated with the niche
electric vehicles (EVs) market. This is because the investors
have perceived it as Tesla's trick to attract and retain a
certain buyer count for a definite period and cash in on that due
to the bleak outlook of the EV market.
The viability of electric cars has been questioned for a long
time due to their higher price tag, short driving range and lack
of charging stations. The overall outlook was so discouraging
that Obama administration had to back away from its goal of
putting 1 million electric cars on U.S. roads by 2015 recently.
The viability issue poses a bigger risk for Tesla if we look at
its financing plan. Its promise to provide a specific resale
value could make it ended up paying a much higher amount than the
market value, if demand for EVs falls significantly.
Currently, the stock retains a Zacks Rank #3, which implies a
short-term (one to three months) Hold rating.