Tesla Inc is running out of money. The perennially cash-strapped firm is still spending a whole lot more cash than it’s bringing in, and that’s a problem with only one solution. Some time soon, plausibly before the end of the year, Tesla is going to need to go back to Wall Street cap in hand.
This is one of the major reasons why investors are nervous about Tesla stock right now. Though the firm’s past capital raising activities have been more or less well received, there is always risk involved in these sorts of transactions. In its oddly neutral, bullish report on Tesla, Citigroup said that the firm’s balance sheet was still a major cause for concern.
Tesla won’t make a profit in 2017, and Wall Street is skeptical about next year. The consensus is that in 2017 Tesla will lose $5.76 per share. In 2018 Wall Street is expecting Tesla to lose $0.60 per share.
Elon Musk has promised profit before, but Tesla hasn’t delivered. The losses from the EV maker mean that cash-raising is likely a necessity. While Tesla stock remains depressed, that could be a major risk.
What will a Tesla capital raise look like?
In recent years Tesla has taken a heterogeneous approach to raising capital. The firm has gotten a mix of loans, both long and short term, from Wall Street banks and supplemented that with the sale of new stock.
The firm’s most recent capital raise, which took place back in March, was a very good example of this. $1.15 billion in total was raised. $750 million of that came from a bond sale, while $250 million came from a new stock issue.
On top of that Tesla has taken a “loan” of $1000 from each and every person who reserved a Model 3. This cash can’t be functionally used, however, as it can be withdrawn at any time.
Back in June Tesla appeared to engage in a sort of stealth cash raise. The firm has a revolving credit line with some Wall Street banks, and it increased the amount it can borrow. That may stave off the need for a larger capital raise for some time, but the firm’s cash burn is still there.
Selling stock in a bear market
If Tesla Inc does decide to sell stock, it could run into big problems. Shares have been falling over the last month, and a bear market is not the best time to sell new shares. There are big risks when a firm offers new shares because it is raising supply.
This dilutes the holdings of those who bought shares before the offering. If shares sell off in the wake of a new offering, it could reduce a lot of market confidence in a firm.
Tesla Inc needs, therefore, to be very careful about timing a capital raise. The CFO Deepak Ahuja is experienced in exactly this sort of financial engineering. He returned to Tesla after the abrupt resignation of Jason Wheeler in March.
There are factors outside of the control of the firm. Despite some dire predictions, the world economy has done pretty well so far in 2017. That can change unexpectedly, however, and a bubbly Tesla stock could suffer harshly in a downturn.
The lower stock goes the more expensive capital raising will get. That’s true whether Ahuja tries to raise cash through debt or equity.
The case for a cash raise
Tesla had about $4 billion of cash on its books at the end of the first quarter. Mr. Michaeli of Citigroup estimates that number will fall to about $1 billion by the end of the year. When the firm’s cash level falls to or near that level, it’s a good sign that there is capital raising activity ahead.
Thursday’s Citigroup report recommends that Musk and his team endeavor to raise $5 billion. That’s what the analysts terms a “proper cash buffer”. If the stock remains in bearish territory, that could be a big ask.
On the other hand, Tesla Inc debt could be easier to issue. In March the firm issued convertible bonds. Those are loans that can be converted into shares in the firm. Structuring debt like that makes it cheaper, i.e. it has a lower yield.
Tesla, if following its own history, will likely offer some kind of mixed capital raise. Unless things change sharply it will likely need to signal its intentions in August and follow through sometime in the six months that follow.
Tesla bears bet on cash problems
Despite the massive rise in Tesla stock, there are still a group of dedicated traders who are certain it’s going to fail. Right now they’re betting that one of the firm’s big problems going forward will be getting its hands on more cash.
Goldman Sachs analyst David Tamberrino, who has a $180 price target on the firm, sees cash raising happening in the first half of next year.
In reality a cash raise in itself isn’t going to do much damage to the firm. What it could do, however, is become a moment of truth for a lot of people betting on the future of the Model 3. If we find out that the firm has been overspending and not ending up with a great product, some investors could get very nervous at a time of capital raising.
This is exactly the kind of push that bears are hoping for.
Is now the time to buy Tesla stock?
Tesla Inc is in a a risky position, there’s no doubt about that. The value of its stock is based almost entirely on profits to be earned far far into the future. It looks like it’s going to be taking on a lot more debt in order to reach its growth goals. Despite that, a whole lot of people are very optimistic about Tesla.
Elon Musk and his team will release earnings for the three months through June on August 2nd. The cash burn number, and the total amount of cash the firm has left on its balance sheet, will be key to Wall Street’s assessment of the performance during the quarter.
If you like Tesla Inc stock, it’s likely better to trade in the long term. Timing price movements using technical or other data has never proved reliable.
Elon Musk and his team are going to continue to try to dominate the EV market. There will be risks along the way, but the firm has already weathered a lot of big storms.
With the Model 3 currently being built, the next winds that buffet Tesla stock are likely to be cash-based. When the firm’s earnings reports arrive in the first week of August, that number is the first you should check.