Tesla Should Raise Cash Now Before It Is Too Late
One of the biggest concerns investors have about Tesla is its inability to generate profits on a sustained basis and the capital intensity of the automotive business leading it to burn cash. For over a year Elon Musk has dismissed the questions and concerns about needing to raise cash, but his tune seemed to change on the March quarter’s earnings conference call when he said, “I think there’s merit to the idea of raising capital at this point.”
While the cash burn in the March quarter was not as bad as the $1.5 billion decrease in cash implies, the company should sell more stock now. As I wrote on March 13 about the shares having a dead cat bounce at $289 (now trading around $233), the company should raise cash while the dilution won’t be a huge hit to current investors.
March quarter’s cash burn really wasn’t that bad
A large portion of the March quarters cash burn can be attributed to the $920 million convertible note that came due on March 1 and having about 8,000 more cars in inventory or in transit at the end of the quarter, which could account for another $200 to $300 million of the cash burn. Tesla had $2.2 billion in cash, but when that number is the second summary point in the financial results press release it shows that it is a big enough concern it should be addressed.
So many projects will need capital
Musk has some very large ambitions for Tesla, maybe too large at this stage of the company’s life. It makes sense to bring the Model Y to market since it leverages the Model 3 platform (hopefully the third row won’t be so tight that the reviews and acceptance are at least acceptable if not positive) and for the semi-truck to be launched. Tesla is a bit trapped in needing to ramp its Energy business since it has been available for a number of years and the purchase of SolarCity needs to be justified (installations fell 38% year over year).
Tesla is also in the midst of building a factory in China and probably needs to open at least one or two more factories in the next two to five years. Building cars is a very capital intensive business and it is better to raise cash when you can vs. when you need to.
Lastly, the ride hailing fleet of 1 million autonomous vehicles in 2020 seems more like a pipedream and is intended to deflect from the poor financial results. Similar to the Model Y announcement before the preliminary March quarter results were released. However, if Tesla really tries to ramp this over a few years it will require capital, especially if it can only sporadically generate enough cash to cover all its capital requirements.
Why raise cash now
Tesla is in the enviable position of having such a large market cap even though it has lost $5 billion in value since it announced its March quarter results three days ago and over $25 billion from its all-time high on September 28 last year when the stock hit $385. It is still worth about $40 billion.
The math is pretty simple to show why this should be done now if the company was to raise $2 billion.
- Capital raise of $2 billion
- Sell shares at $200 (assuming the price continues to fall or buyers will only pay $200)
- Have to sell 10 million shares
- There are currently 173 million shares outstanding (using the diluted share count)
- Only dilutes the current shareholders by just over 5%
If the capital raise is $3 billion the dilution would be 8%. This seems like a small price to pay to at least temporarily address one of the major concerns investors have.
Fallen through a key technical level
Tesla’s shares traded down to $252 in April last year and $250 in October. Both times the shares bounced back and traded above $370.
However, since December the stock has been in a declining pattern of lower highs and lower lows as can be seen in the channel formation below. And in the past two days the shares have broken below the $250 support level, which could but additional pressure on them.
Note that anyone who bought Tesla shares since the beginning of 2017 and still hold them is underwater. This could put more pressure on the stock if investors are tired of losing money on them.