Tesla announced on Wednesday that it plans to raise more than $US1 billion in capital in 2017 — a combination of $US250 million in equity and $US750 million in convertible debt, with an additional $US15 million going to the underwriting bankers for the offering.
At the moment, Tesla’s cash position is fairly strong: the carmaker has about $US3.5 billion on hand. But the company has said that it will spend $US2 billion-2.5 billion to launch the Model 3 mass-market vehicle later this year.
Typically, Tesla likes to have a $US1-billion cash cushion. So the latest capital raise — following an August 2015 raise and a May 2016 raise of about $US600 million each, all equity — suggests two things.
First, that Tesla is expecting to spend the bulk of its cash in 2017 and won’t have that $US1-billion cushion. This is entirely plausible, as launching a new vehicle is always expensive, even for a well-established automaker. Ford has been spending heavily over the past two years, for example, to revamp its F-Series pickup trucks. Those costs have shown up in the automaker’s quarterly and yearly financial reporting.
Second, the capital raise suggests that Tesla figures there’s no reason to not raise money when its stock has rallied well above $US200 per share in early 2017 and its market cap is around $US40 billion. Capital raise after capital raise obviously signals an intense cash burn rate, but if Tesla is going to change the world and push electric cars to a point where they constitute more than 1% of global auto sales, chilling out on the spending and letting the balance sheet take a breather doesn’t make much sense.
Wall Street is an ATM
It does appear that Elon Musk and his team are addressing some concerns that the company is using Wall Street like an equity ATM. The equity raise this time around is three times smaller than the debt issuance.
Tesla has several billion in previously issued convertible debt coming due in the next few years, but the $US750 million it will sell this time around doesn’t mature until 2022.
So the company is buying itself some time and providing investors with a way to make a long-term bet, shielding themselves from the volatility that Tesla’s stock has experienced over the past three years.
A Tesla bear, Colin Langan of UBS, published a note on Thursday arguing that investors shouldn’t expect a break from future capital raises. The forthcoming raise “is at the low-end of the $US1-2bn we expected, and could imply another raise later if the Model 3 is delayed,” he wrote.
Langan has a $US160 target price and a “sell” rating on Tesla, whose stock is now trading around $US260.
“With the capital raise, TSLA’s cash position will grow to $US4.6bn,” he continued. “The stock is trading up as investors likely expected a larger raise. However, 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.”
The obvious question is, “Don’t investors understand how much it costs to launch an entirely new car?” Maybe they don’t. But they’re going to learn in a hurry that although Tesla is sometimes thought of as a high-tech hero of Silicon Valley, when it comes to rolling cars off an assembly line, it’s just like any other automaker.