Tesla stock shrugs off the latest equity offering

Tesla stock shrugs off the latest equity offering
Image Courtesy: Sheeraz Raza for ValueWalk, taken at Westfield Mall, London.

Tesla Inc. (NASDAQ:TSLA) announced plans for a $2 billion stock offering today — only two weeks after CEO Elon Musk said they had no plans for another capital raise any time soon. Initially, Tesla stock tumbled as much as 7% before opening bell, but after the markets opened, it shrugged off the new offering and climbed nearly 3% by midday.

New capital raise announced

Two weeks ago with their fourth-quarter earnings report, Musk said it wouldn’t be practical for the automaker to raise funds. Tesla has become profitable, and even more than what analysts had been predicting.

He also said two weeks ago that the company could fund itself without needing any help from Wall Street. Musk also said they had been sensible with their spending without holding back on expenditures that were needed to make continued progress on their targets.

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The company didn’t offer many details about what it will use the proceeds from the capital raise for. Tesla said it will use it to strengthen its balance sheet and for “general corporate purposes.” It’s generally assumed that the equity offering will be used to help fund the company’s capital expenditures for this year.

The news about the Tesla stock offering came less than an hour after a regulatory filing in which the company revealed plans for as much as $3.5 billion in capital expenditures for 2020. At the high end of the automaker’s projection for expenditures this year, the increase would be 164% from what the company spent on capital expenditures last year. Tesla spent $1.33 billion last year, which was far below its early plan for about $2.5 billion.

Analysts praise Tesla’s stock offering

Analysts praised Tesla’s stock offering as a way to beef up the company’s balance sheet and push its expansion plans further along. Cathie Wood of ARK Invest has been bullish on Tesla for a long time, and she has an astonishing $7,000 price target on the stock.

She tweeted that the Tesla stock offering increases their confidence that the company will gain share in the EV market over the next five years. She also said it increases “the probability that our bull case for the stock is correct.”

How many shares will the Tesla stock offering include?

The Tesla stock offering will increase the number of shares, which means dilution for current shareholders. Analyst Ben Kallo of Baird estimates the share dilution at about 2% for current shareholders. Thus, the shares tumbled right after the equity offering was announced, but even more share dilution couldn’t dissuade investors from buying more on the pullback.

Although Tesla supposedly wasn’t planning another capital raise any time soon, some have noted that the company’s market capitalization has increased 200% since October. This increase means it could make sense for the automaker to tap into the significant gain in its share price.

Musk will participate in the Tesla stock offering by purchasing up to $10 million of the new shares. Oracle CEO Larry Ellison, who serves on the company’s board of directors, will participate by purchasing up to $1 million of the new shares.

The new shares in the stock offering are scheduled to begin trading tomorrow. Morgan Stanley and Goldman Sachs are underwriting the offering and have an option to buy another $300 million worth of the new shares within 30 days, brining the total expected amount of the capital raise to $2.3 billion.

The filing released today also included a statement that the Securities and Exchange Commission has finished its probe of statements Musk made in 2018 about taking Tesla private. The agency has also finished its investigation into his previous estimates of production rates for the Model 3.

The investigations were closed on Dec. 4, but the same day they were finished, the SEC also subpoenaed the automaker asking for information “concerning certain financial data and contracts.” Even news about the subpoena wasn’t enough to weigh on Tesla shares.

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