Tesla (TSLA) is up 4% after the company announced a $650 mln common stock and $1.35 bln convertible senior notes offering this morning.
Normally, a stock falls on the announcement of a capital raise that dilutes shareholders. In Tesla's case, as we have seen in the past, a capital raise removes the balance sheet risk-overhang.
Elon Musk is far from a conventional Chief Executive. Analysts have been urging a capital raise to reduce balance sheet risk for some time. Elon Musk made it a point of pride to not raise capital for over a year. Last week on the first quarter earnings call, he admitted that raising capital would make sense.
So what changed?
Up until last week, Elon Musk had said Tesla would be cash flow positive and profitable going forward. That didn't really add up given the company's robust product road map, which Mr. Musk says is the best of any company in the world. Tesla expects to begin production of the Model Y compact SUV and Semi truck next year. Tesla is also building a Gigafactory in Shanghai this year with the help of local Chinese financing.
After reporting a net loss for the first quarter last week, Tesla said that it will report a significantly smaller net loss in the second quarter and return to profitability in the third quarter.
Elon Musk dismissed demand concerns on the conference call with analysts, but he was not very convincing. The stock subsequently fell to a two-year low as concerns over demand, margins and profitability mounted following weak first quarter results and a series of price cuts this year. Tesla reaffirmed its seemingly lofty delivery guidance for 2019, up 45-65% to 360,000-400,000 EVs.
What's more, the company's Autonomy Day two days before earnings highlighted ambitious plans to push the envelope in autonomous driving. Tesla said that its newest EVs have the hardware for full self-driving capabilities and that the software to support it will come around later this year. Elon Musk went so far as to predict that Tesla will have one million Tesla robotaxis in its network next year. Everyone takes his projections with a grain of salt at this point. In any case, autonomous efforts are another drain on capital.
This morning, Elon Musk indicated interest in purchasing $10 mln worth of stock at the offer price. That would not be the first time he has bought into the company's stock offering. It is a nice vote of confidence, athough it amounts to rather small potatoes for Mr. Musk. He is already the company's largest shareholder with nearly 34 mln shares, worth roughly $8 bln.
Another factor helping shares today is the fact that 28% of the float is sold short; the stock tends to squeeze higher in the absence of selling pressure.
Tesla stock is down 27% year-to-date. The company was expected to earn roughly $6/share on a non-GAAP basis at the beginning of the year, but estimates now call for a modest net loss.
With an enterprise value approaching $55 bln, the stock trades at ~22x EBITDA estimates for the year.