A Tesla Inc (TSLA) Cash Raise Gets … A Hero’s Welcome?

Tesla stock - A Tesla Inc (TSLA) Cash Raise Gets … A Hero’s Welcome?

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UPDATE: Tesla Inc (NASDAQ:TSLA) announced Friday that it has completed a $1.2 billion sale of common stock and convertible senior notes. CEO Elon Musk purchased roughly $25 million in shares.

Looks like Tesla Inc (NASDAQ:TSLA) CEO Elon Musk wasn’t kidding when he told Tesla stock holders back in February that the company would likely raise funds soon, as a way to “reduce risk.” The company confirmed this week a fundraiser worth $1.15 billion was in the works.

A Tesla Inc (TSLA) Cash Raise Gets ... A Hero's Welcome?

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In almost all cases, the issuance of new shares or the sale of new debt is a worry to shareholders, simply because it dilutes the float, creates a financial obligation, respectively.

In this particular case, though — in light of the modest but measurable rally TSLA stock made in the wake of the announcement — traders seem to be thrilled with the small size of the secondary offering, convinced Tesla will get more out of the investment in itself than it’s putting in.

Just in Time?

There’s little doubt as to what the money is going to be used for. Tesla has been prepping for large-scale production of the Model 3, which will serve as a means of entering the mid-price car market with an affordable (but sexy) electric vehicle. Although plans have been laid out, the next step is the much more expensive retooling and upgrades of its production line.

Tesla will issue $750 million worth of convertible debt and $250 million worth of Tesla stock. The remaining $150 million is optional, earmarked for the investment bankers if they choose to step in as well.

Analyst responses have been mixed. Most consider the small amount the company is seeking a sign that Tesla feels good about the speed with which the Model 3 will go into production, and how well it will sell once production begins. Baird’s Ben Kallo is one of the encouraged observers, commenting:

“We view the offering positively as it should help de-risk the Model 3 launch, provide additional capital for Model 3 production equipment and/or investment in the gigafactory, and remove an overhang on the stock. Bears will likely say the deal is too small, although we believe this displays TSLA’s confidence in the Model 3 timeline and anticipate shares will move higher. TSLA remains a favorite pick for 2017.”

Analysts with UBS are at the worried end of the spectrum, saying:

“Liquidity and cash burn remain key near-term risks, and investors may grow weary of continued raises as this is the second capital raise in a year.”

Both points of view are correct, underscoring the crux of the debate regarding ownership of TSLA stock.

Bottom Line for Tesla Stock

While the news has inspired plenty of speculation regarding the time frame for the Model 3 and how much cost-insight the company already has about the new vehicle, caution is advised against drawing any sort of conclusion. Something yours truly explained back on Feb. 23 still applies:

“Owning Tesla stock remains an adventure in gauging how traders will feel about the rhetoric, as the results continue to tell us little about the future health of the company.”

That hasn’t changed in the meantime.

The launch of a mid-priced electric vehicle and the projected ramp-up of less than 100,000 cars per year to half a million cars per year in less than three years has never been done before.

There’s also the not-so-small matter of SolarCity, which Tesla acquired last year. Presumably it’s still losing money, though in light of comments made along with the release of last quarter’s numbers, that may not be the case for much longer. The Q4 letter from Musk noted of SolarCity’s business as well as the company’s energy storage arm:

“During this transition, we plan to prioritize cash preservation over growth of MW deployed. As this transition progresses, we see a return to growth of MW deployed later this year to help us generate the cash and realize the cost synergies we projected prior to the acquisition.”

It’s conceivable profits from the energy division could help supply cash for the completion of the Model 3 production line.

Moral of the story? Take all the chatter about the size of the fund-raising and what it may mean with a grain of salt — nobody really knows what Musk has in mind. It’s entirely possible he’s looking to raise some money now just because he’s got some credibility currency. There’s little doubt he’ll have to issue more Tesla stock again in the future.

This is still more than anything a story stock, even if the pros discuss it as if it’s a conventional investment.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/a-tesla-inc-tsla-cash-raise-gets-a-heros-welcome/.

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