Tesla plans to capitalize on its recent surge in value by issuing 2.65M new shares with expected proceeds of $2.3B. With the stock down as much as 7% in pre-market trading and up 5.5% during the day, investors are signaling mixed feelings about this move. Here’s how we assess it and why, ultimately, we believe it to be a positive for the company:
- We estimate that Tesla needs $2.5B in cash to fund ongoing operations. This number will expand as they bring Gigafactory Shanghai and other initiatives up to speed. Tesla ended Q4 2019 with $6.3B in cash, so this new capital raise would bring that total to $8.6B. While past capital raises have been in conjunction with high-capex projects like production expansion, we see this as purely an insurance policy that strengthens Tesla’s case for continued success.
- We do not believe, as some may expect based on the seemingly unneeded raise, that Tesla plans to use the proceeds for M&A.
- The stock initially traded down because 1) issuing new shares dilutes current owners and earnings (in this case by ~1.9%), and 2) it sends a signal that management believes the stock is fairly (or richly) valued.
- Musk had previously assured investors that he did not plan to raise additional capital. However, while Elon backpedaling on his promises is a common criticism of Tesla, the company’s balance sheet is a much more common (and valid) criticism.
- Cash in the bank is the backbone of success for a high-growth technology company. Being able to weather the inevitable yet unpredictable ebbs and flows of the EV market and the macroeconomy is critical for Tesla. The company has one of the most compelling product roadmaps in the world and the likelihood of it coming to fruition just increased.
- We’re also not surprised to see Tesla, a company that admits to having faced several near-death experiences, investing in an insurance policy that will all but put to rest any fears of running out of cash.
- Long-term, we believe a company that has a pole position in the future of transportation related to electrification and autonomy will be worth more than its current $144B market cap.