Tesla doesn’t just make cars. It sells them, too. And now it’s getting into the used-car business, just when prices for trade-ins are soaring.
The electric vehicle pioneer has put a trade-in value estimator on its website.
“Trade-in your current vehicle for a new Tesla. Enter your VIN to receive an estimate for your trade-in.”
Once an owner types in the VIN number, it’s just a click to get an estimate.
Tesla (ticker: TSLA) didn’t respond to a request for comment.
Offering to buy used Teslas can benefit the company in a couple of ways.
For starters, it can drum up demand for new Teslas. Today, the company doesn’t have a lack of demand: The time to get a new model Y can stretch out for months, based on the company’s website.
And selling used cars is pretty profitable these days. The Manheim Used Vehicle Index, the benchmark gauge for used-car values, is up almost 60% from prepandemic levels.
“This could be boost to [other sales] into 2023 given used car market dynamics,” said Wedbush analyst Dan Ives.
Tesla doesn’t have a traditional dealer network like traditional auto manufacturers. Ford, General Motors, and the like sell vehicles wholesale to franchisees. Tesla, on the other hand, is the maker as well as the seller, which lets it charge retail—and helps boost per-car profits a little. Typical retail markups from wholesale prices are in the 2% to 5% range.
Traditional auto makers don’t buy and sell used cars. Historically, that has been left to dealers. Roughly 40 million used cars are sold in the U.S. each year, or roughly 15% of registered vehicles on the road.
One of the largest used-car dealers in the U.S. is CarMax (KMX), both in terms of market capitalization—more than $14 billion— and vehicles sold—almost 900,000 over the past 12 months. The company’s gross profit per used vehicle hit $2,339 in its most recently reported quarter, up from $1,937 per vehicle two years ago.
Most traditional auto makers do lease cars, though.
Ford Motor (F), for instance, has its Ford Motor Credit business, which is like a bank inside a card company. FMC has about $93 billion in loans on its books and about $105 billion in net debt—essentially all the net debt at Ford. The automotive company balance sheet is in pretty good shape.
Tesla leases cars, too. It reported that about 4% of the new 254,695 cars sold in the second quarter were subject to lease accounting.
Cars coming off lease, however, aren’t used-car sales. Any resale or auctioning of off-lease vehicles shows up in the “service and other revenues” line item. Service and other generated $4.2 billion, or about 7% of total sales, for Tesla over the past 12 months.
Used-car sales probably would go into that line item. Investors should watch out for growth and improving margins in that portion of the business to get a sense for just how big Tesla’s used-car ambitions are.