Tesla Motors Inc (TSLA) just raised the stakes for TSLA stock by diluting shareholders’ stakes with a big secondary offering, and that makes the success of its Model 3 electric vehicle increasingly look like a make-or-break proposition.
Indeed, Tesla Motors went and raised $1.46 billion in equity capital to fund the expansion necessary to manufacture enough Model 3s for everyone who wants one.
(Part of the cash is also aimed at paying the tax bill on an option exercise by founder and CEO Elon Musk, who will donate the stock to charity.)
But make no mistake, Tesla is leveraging the goodwill of extant shareholders — the stock sale came with net dilution of 5% — to make the lower-margin Model 3 the vehicle that puts TSLA stock over the top. In other words, it had better work.
Bulls believe that this new capital is just what the electric “disruptor” needs to become the leader in the burgeoning market of mid-priced electric cars. Hey, the Model 3 is a hit so far.
For bears, this looks more like an example of the sunk-cost fallacy than a wise way to build scale. After all, the “Big Three” have electric vehicle ambitions of their own, and since much of the green move is mandated by regulation, they can’t just up and cede the market to Tesla.
More likely, it’s the former. Here are five reasons to be bullish on TSLA in light of the secondary offering:
TSLA Short Interest: True, anytime a stock carries heavy short interest, you’ve got to give the bear case an honest hearing. Maybe they’re on to something. At the same time, it also spring-loads a stock for big gains on a short squeeze. With more than 20% of shares outstanding sold short, according to S&P Capital IQ, Tesla stock will get exaggerated upside on any good news.
Tesla Model 3: Demand for Tesla’s first affordable has been far greater than anyone predicted, including Musk himself. In less than two months the company has booked just under 400,000 orders. It’s a very imperfect comparison, of course, but sales of the Toyota Motor Corp (ADR) (TM) Camry — the best-selling U.S. sedan — totaled 429,000 for the entirety of 2015.
Profitability Is in Sight: One fact that bears love to trot out is that Tesla has had only one profitable quarter — and that was three years ago. Fair enough, but investors are paying for future earnings, not what’s past. On that basis, Tesla is set to explode. According to a poll by Thomson Reuters, Wall Street expects Tesla to post earnings per share of 77 cents this year vs. a loss of $2.3o in fiscal 2015. Next year’s EPS is forecast to balloon to $3.38.
Tesla Stock Has Quieted Down: TSLA quite rightly has a reputation for volatility and the numbers bear that out. Shares have a five-year beta of 1.35. That greatly increases the odds of buying high. But things have really settled down for Tesla recently. The stock’s 52-week beta is just 1.01, which is no more volatile than the broader market.
- OPPOSING VIEW: Shady TSLA Stock Offering Reeks of Desperation
The Valuation Isn’t Crazy: Tesla is by no means a value stock, but neither is it overpriced to the point where it’s an outlier. Sure, the stock goes for 65 times forward earnings, but then it has a long-term growth forecast of 35% per annum too. That’s actually cheaper than Netflix, Inc. (NFLX), which has a forward price-to-earnings multiple of 87 supported by a compound annual growth rate of 23%.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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