Morgan Stanley analyst Adam Jonas has highlighted the need for Tesla Inc to establish a full-scale financing subsidiary to cater to the evolving auto market and meet customer demands.
The Tesla Thesis: With the increasing preference for monthly payment options and the potential impact of IRA leasing rules, Jonas believes the time is right for Tesla to develop a comprehensive financing offering.
Fincos can drive sales and steady profit and contribute to increased brand loyalty, the analyst said.
“By not having a comprehensive financing offering, Tesla may be leaving sales on the table,” Jonas wrote.
Jonas maintained an “overweight” rating on Tesla with a price target of $200.
GM’s Example: Drawing parallels to General Motors‘ creation of the General Motors Acceptance Corporation (GMAC) in 1919, Jonas emphasized the historical significance of financial innovation in driving mass auto ownership.
Key Points: Jonas presented several reasons supporting the establishment of Tesla Financial Services:
Market Demand: As Tesla targets multi-million unit volumes, financing becomes crucial as the norm for car purchases, and Tesla must adapt to facilitate customer requirements.
Competitive Advantage: By providing a full-scale financing offering, Tesla can capitalize on additional sales opportunities and improve market share.
Data and Service Revenue: With access to sufficient residual value information, Tesla can make informed leasing decisions and benefit from recurring service revenue at the end of lease terms.
Monetization and Flexibility: A financing arm opens avenues for used car sales, enhances customer loyalty, and offers flexibility in payment terms.
Scale and Partnership Opportunities: Tesla’s strong balance sheet and reputable brand make it an attractive partner for banking and asset-backed security (ABS) institutions.
Highlighting the importance of captive financial services in the EV market, Jonas cited Ford Credit as a case study of how a financial subsidiary can contribute significantly to profitability.
Moreover, Jonas discussed Tesla’s affordability efforts, noting its ability to fill the gap for affordable vehicles left by traditional automakers. He anticipates further price cuts and the potential launch of a sub-$25,000 Model 2 to address this demand.
Additionally, Jonas brought attention to the IRA “leasing loophole,” which could allow Tesla to navigate certain restrictions related to battery sourcing and assembly requirements by offering lease options.
Conclusion: Jonas said Tesla’s strong financial position, potential partnerships, expansive network, and commitment to cost leadership make it well-positioned to establish a successful financing subsidiary.