Tesla to sell up to $5 billion in stock

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Earlier this week, Tesla announced that it will sell up to $5 billion in stock. The announcement came a day after the company completed an investor pleasing 5-for-1 stock split. Tesla said in a filing with the Securities and Exchange Commission that the additional shares will be sold "from time to time" and "at-the-market" prices. It said banks will sell shares based on directives from Tesla.

Tesla gave few details about how it planned to use the $5 billion, but in a stock market filing it said: “We currently intend to use the net proceeds from this offering to further strengthen our balance sheet, as well as for general corporate purposes.”

How does the move affect Tesla and investors?

For Tesla, it’s a very smart and timely move after the historic rally in its shares and with the appetite still strong among investors.
  • Instead of tapping the debt markets and hence paying interest for years, Tesla is taking advantage of its share price which has seen an almost 1,000% surge over the past year- as a cheap means of raising money to fund its expansion plans. Tesla’s pipeline includes several capital intensive projects; including the construction of its first European manufacturing and battery centre in Germany and a new factory in Texas, while another production facility recently came online in China.
  • Raising money by selling stocks will enable Tesla to raise enough capital to strengthen its balance sheet and fix its capital structure by growing its cash position and slowly getting out of its debt situation which almost destroyed the company a year ago.
For investors, there are pros and cons:
  • On the one hand, Tesla’s move to raise $5 billion boosts confidence in the company and its financial position. Last summer, Tesla was on the brink and its shares tumbled after it posted over $1.1 billion in losses in the first half of the year. Although the company had record car sales, it had a massive debt problem and was burning cash so quickly that it risked running out of it. Since then it has recovered spectacularly and its fortunes have improved remarkably. Management has done good things over the past year to improve the company's financial performance. The stellar share performance over the last year reflects that. The move to raise capital is another great decision. It strengthens Tesla's capital structure and enables it to invest in capital intensive projects without worrying about high debt. It puts a stop to the lingering questions about Tesla’s future due to high debt and throws the bear thesis out of the window. The company is doing this without diluting equity; it is sacrificing only 1% of its $464 billion market cap. So certainly that’s positive news.
  • On the other hand, there are question marks over whether the historic rally in stock price is justified and if the stock is long overdue for a pullback. Part of Tesla's share appreciation is due to the company reporting its fourth straight quarter of profits in its last report, which qualifies the company for inclusion in the S&P 500. Tesla also posted better-than-expected second-quarter vehicle deliveries. Still, the rate at which investors have flocked into the stock has left many lost. The stock has climbed so high, making the company more valuable than traditional carmakers such as Toyota; Tesla is now the world’s biggest car company by stock market value. It has also leapfrogged some of the world’s biggest listed businesses including Walmart, which is the largest US company by revenue. These signs might indicate that the stock is due for a correction and investors who buy the stock on the new $5 billion equity distribution are going to get burned (at least in the near term).
What do you think? Is Tesla’s move to raise capital a smart move for the company? How about for investors?


Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.

Comments

  1. WanderingButNotLostSeptember 4, 2020 at 1:56 PM

    This is a good take on the issue, thanks for sharing the insight!

    ReplyDelete

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