Tesla Motors Inc has a big cash problem, but the firm has figured out a way to take the pressure off. In a statement issued on Thursday morning, Tesla Motors said it will issue $500m worth of stock in the firm in order to fund itself going forward. At the end of the second quarter, Tesla Motors had a little over $1B in cash on hand.
Tesla is already swimming in debt, and the firm has been boosted by the low rate environment in the US in recent years. With rates set to rise, however, and the risks around Tesla Motors getting higher, selling debt to fund itself might cost more than it could afford. Selling new shares is a risky move, but it doesn’t cost Tesla Motors much directly.
Selling new Tesla Motors shares
Tesla Motors says that Elon Musk, the firm’s CEO, will buy $20m shares in the new offering. The firm wasn’t clear about how, exactly, it’s going to spend the money, but said it would go toward the firm’s global expansions of stores, its charging network and its Tesla Energy power cell project.
Tesla Motors burned about $360m in cash in the three months through June, and has managed to go through close to $800m since the start of the year. That cash burn has been a weight on shares, as traders worry that Tesla Motors will run into trouble trying to fund itself through the launch of the Model X and beyond.
The firm’s EV SUV will arrive on the road before the end of the third quarter, but it’s not going to really launch until very late in the year. Elon Musk, in his second quarter letter to those with shares, said that he expects a ramp up in production to happen very late in the fourth quarter.
That means that Tesla Motors likely has another six months of heavy cash burn ahead of it before it can lessen the rate at which it’s going through its stockpile, and it will need more than the $1B it’s sitting on right now to keep itself stable.
Tesla Motors shareholder pain
There is little direct cost for the issue of new shares, but that doesn’t mean that Tesla Motors won’t cause itself any trouble with the new offering. Those that watched David Fincher and Aaron Sorkin’s The Social Network will know about the pain of share dilution. That’s about to happen to every single Tesla Motors shareholder.
The new $500m share sale will boost the number of shares that are out there, and, all else equal, reduce the value of each share held right now.
At time of writing, Wall Street seemed more focused on the hopeful side of the share offering. Shares were up 1.6 percent in pre-market trading at time of writing.
It’s likely that many Wall Street research houses will weigh in on the new Tesla Motors offering on Thursday and Friday. Wall Street will give those reports weight, and shares could be very uneven as the market tries to decide whether the decision is good or bad for Tesla Motors. Shares in the Model S maker have lost more than 8 percent of their value in the last month.