Fantasy and reality now find themselves at cross purposes at Tesla Inc (NASDAQ:TSLA). The Palo Alto-based company once impressed investors and consumers alike with power generation technology could change the way the world generates and consumes energy. However, the costs of bringing many of CEO Elon Musk’s goals to reality has come at a cost. Now, with Tesla’s cash crunch, it must prioritize company stability over bringing concepts to market.
Mr. Musk Is This Generation’s (Nikola) Tesla … Not Its Steve Jobs
Tesla Inc holds $2.67 billion in cash. However, its combined short and long-term debt amount to $10.76 billion. Its current ratio has also fallen below the critical level of 1 (meaning its ability to pay immediate bills has come into question). The company lost $710 million ($4.19 per share) in its last quarter. At the same time, it needs funding to ramp up production of the Model 3 and invest in new products.
Many say that Mr. Musk is the Steve Jobs of this generation. However, when one also considers his business sense, he seems to have become the Nikola Tesla of our generation . Much like Mr. Tesla lacked the marketing savvy of rival Thomas Edison, Mr. Musk appears to lack the business sense that Mr. Jobs employed to help take Apple Inc. (NASDAQ:AAPL) to the world’s largest market cap. This bodes poorly for Tesla stock investors. Now, Mr. Musk must find a way to innovate when he lacks the funds and the profits to maintain production levels on his current concepts.
Tesla Inc Should Consider Further Dilution of Its Stock
As I predicted in an earlier article, Mr. Musk will need to sacrifice the value of TSLA stock to save Tesla Inc. The value of the company’s bonds has fallen to new lows as confidence in the company wanes. Given the difficulty of borrowing under such conditions, Tesla must look for other cash sources.
The most obvious answer involves further dilution of its stock. Shares outstanding, which stood at about 123 million at the beginning of 2014, have risen to 169.79 million today. Even after the dilution, TSLA still holds a higher market cap than Ford Motor Company (NYSE:F). With the stock still trading at over $280 per share, room exists to raise cash in such a manner.
TSLA trades well below its 52-week high of $389.61 per share. However, the stock has run up from a time just over five years ago when the stock traded below $40 per share.
And dilution does not necessarily mean a lower stock price.
The value of Tesla stock went up in anticipation of the potential of Tesla Inc. Diluting the stock could restore some of that confidence. If the company can restore the faith of investors, the dilution could even have the counterintuitive effect of raising the stock price. No guarantee exists that that would occur. Still, it stands a better chance of boosting the stock price than letting the current situation stand.
The Bottom Line on Tesla Inc Stock
Tesla’s cash crunch places the company into a crisis. Losses continue, and options for borrowing funds dwindles. Now, Mr. Musk must find the funding to meet current obligations and innovate for the future. Given the junk status of Tesla’s debt, one option involves diluting the stock further.
The price of Tesla stock rose to lofty levels on the belief that the company would deliver innovation comparable to that of Apple in Steve Jobs’s lifetime. Selling stock to meet funding could restore that confidence.
Given the cash crunch, I will not tell people to buy TSLA stock in this situation. However, a sell recommendation will not occur under current circumstances either. Diluting the stock may hurt the equity, but it may also save the company. It would at least allow Tesla Inc to meet its goals.
It might also set the stage for an eventual re-emergence of the Tesla stock price. Perhaps if Mr. Musk can save his company, he can bring his innovations to market and avoid the poverty that plagued his company’s namesake, Nikola Tesla.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
