After nearing all-time highs earlier this year, Tesla Inc (NASDAQ:TSLA) stock has pulled back. The company’s fourth-quarter earnings report appeared mixed, and investors may have “sold the news” relative to TSLA stock. A downgrade from Goldman Sachs rattled Tesla stock a few days later, and the negative trend has continued since.
One of the underlying drivers may be fears that Tesla will have to execute another offering of TSLA stock.
The company has to raise cash — over $2 billion — for its Model 3 buildout. The potential offering raises two concerns. In the short-term, the announcement of an offering could push Tesla stock lower. The company largely shrugged off last year’s offering, which raised $1.7 billion, but TSLA stock was also ~15% cheaper at the time.
Longer-term, the dilution of an offering means existing owners of Tesla stock will have a smaller share of the future profits from the company.
It does appear that another equity offering is likely in 2017. And while an offering probably won’t tank TSLA stock on its own, investors might want to wait for the dust to settle — particularly with TSLA still trading near the highs.
Will It Have to Sell Tesla Stock?
Tesla finished its fourth quarter with $3.4 billion in cash and equivalents, so it’s not as if the company is running out of capital. But, as mentioned earlier, in the Q4 investor letter, TSLA said it needed $2 to $2.5 billion in capital expenditures for Model 3 production. And that’s not the only cash commitment.
The company also needs to build out its Supercharger network. The limited capacity of the network has led to complaints about congestion in urban areas and a lack of stations in less populated regions.
Tesla stock does have some cushion on its short-term credit facilities, of about $400 million. So, the company probably could skate by on its existing cash and borrowing capacity. But that could raise some downside risk, as no less than Tesla CEO Elon Musk has admitted.
On the Q4 earnings call, Musk seemed to hint at an equity offering this year. Answering an analyst question, Musk framed the decision as “a question of what’s the risk tolerance of the company.” But the Model 3 ramp — plus existing cash commitments — would “get [Tesla] very close to the edge,” he admitted. “We’re considering a number of options, but I think it probably makes sense to raise capital to reduce risk,” he concluded.
Will An Offering Affect the TSLA Stock Price?
On its own, the hint at a 2017 offering of Tesla stock probably isn’t a big deal. But it’s worth noting that Musk’s tune changed in just three months. On the Q3 earnings call, Musk said that, “our current financial plan does not require any capital raise for Model 3 at all.”
To be fair, the CEO hedged around that statement, pointing out the possible need for “a larger buffer and to sort of de-risk the business.” Most TSLA stock bulls would likely argue that there is little distinction between the two statements, except a modest distinction in tone. Tesla stock bears might disagree, however, and it does appear that Musk’s Q4 statements regarding a stock offering have contributed at least in part to recent declines.
At this point, the impact of an offering seems likely to be relatively muted, on its own. TSLA’s cash and credit availability covers Model 3 spend by roughly $1.5 billion. Operating cash flow was negative in 2016, but Tesla burned only $125 million on that line. With a market capitalization of $40 billion, an offering of just 5% of incremental shares could raise $2 billion. And it seems unlikely that Tesla will need more than that — at least anytime soon.
Bottom Line on TSLA
The catch is that Tesla stock continues to be buffeted by sentiment from both TSLA bulls and bears. And both groups will watch an equity offering closely. Should Tesla try to raise a higher-than-expected amount of capital, bears will cite potentially disappointing production numbers. Should Tesla execute a small sale of TSLA stock — or none at all — bulls will see a positive sign for the Model 3 and beyond.
The discussion ahead of the equity offering seems likely to add volatility to what is already a volatile stock. And it will probably only harden the division between Tesla stock bulls and bears.
For investors who already have staked out their position, the equity offering likely changes nothing. For the rest of us, it might be worth sitting out until the TSLA stock sale plays out.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
