Tesla May Need To Raise $3 Billion In New Stock Offering

How will Tesla Motors finance all the highly ambitious, capital intensive projects it is committed to at the moment? The company has a little over $1.4 billion in cash on hand, but preparing to build up to 200,000 Model 3 cars as early as next year, continuing construction of the Gigafactory, building new sales and service locations, and aggressively expanding its network of Supercharger locations will eat up far more than that.

Analyst Brian Johnson of Barclays projects a $3 billion equity raise sometime in the second quarter. That would require selling 14.5 million new shares in the company at current stock prices. Selling that many new shares would add about 11% to the total currently outstanding. “With its ambitious plans that will require an incremental fundraising, we view Tesla as more of a cash-hungry startup unicorn than a traditional public company,” wrote Johnson in a research note. “With Tesla likely to come to the market for a capital raise near-term, it’s worth asking whether it deserves an up round or a down round.”

Tesla took in nearly $400 million in cash from Model 3 reservation fees in April, but Elon Musk says that money should not be used to pay capital expenses, especially since all of those deposits are refundable. “I don’t think we want to rely too much on customer reservation money as a source of capital,” he said during the first-quarter earnings call with analysts. “Maybe there is a buffer or something, but it’s not as a primary source of capital. I think it’s going to make sense for us to raise some amount of money — some combination of equity and debt — and make sure the company has a good buffer of cash on hand. I think it’s important for de-risking the company.”

The company started the year anticipating $1.5 billion of capital expenditures and now projects spending more like $2.25 billion to take it from niche player to high volume manufacturer.

“The significant acceleration of capacity and assembly plans of course necessitates a large increase in capital spending, providing perfect rationale for a large equity capital raise which might have otherwise been needed or at any rate desired, due to ongoing free cash burn and liquidity-comfort levels,” wrote Ryan Brinkman of JPMorgan Chase & Co.

Tesla customers are bullish on the company. There’s no doubt about that. But will the financial community continue to be charmed by Tesla’s lofty goals and aggressive capital spending? There is a reason why so many investors have chosen to short its stock — a bet that it will decrease in value in the future. It has already declined more than 10% since Musk announced the company was moving its Model 3 production goals ahead by two years. Where some see company strategy as bold and daring, others think it is simply reckless.

Has Musk bitten off more than he can chew? One thing is for sure. He has a prodigious appetite for risk. So far, his ventures have made him and those who believe in him very wealthy. But there is a reason why all financial disclosures warn that past history is no guarantee of future performance. “We’ll see,” said the Zen master.

Source: Bloomberg via Automotive News  Photo credit: Bloomberg