Tesla – The mountain of burning capital grows larger $TSLA $TSLAQ
Telsa observers (both long and short) are today processing news that the company wants to raise capital. It wants to issue both bonds ($1.35 billion of 2024 convertibles) and equity (net proceeds of $740 million).
The stock popped higher on the initial announcement, as Elon Musk indicated his interest to buy $10 million in the deal, and there was relief that the company might avoid a disorderly restructuring in the short-term.
With respect to the potential $10 million purchase by Musk, this does not seem like a big deal for a guy who is on a $55 billion dollar bonus package and who treated a $20 million fine by the SEC like a parking ticket. But it certainly improves the “optics” around the deal.
As for the avoidance of a disorderly collapse, the proposed issuance could indeed be a significant boost for the company. My own updated financial model for Tesla, using “bull-case” assumptions, now predicts that the company will avoid running out of cash. The bull-case assumptions are not ones which I believe will transpire in reality, but I do acknowledge the reduced risk which the company would enjoy by raising an additional $2 billion+.
An admission of defeat
Eight days ago, during the Q1 conference call, Musk acknowledged that there may be “merit” to the idea of raising capital. This was quite an important moment for the bear community, though it was no major susprise. Many Wall Street analysts and even some Tesla bulls agreed that the company’s balance sheet was vulnerable.
Given that Musk said that Tesla would be profitable and cash flow positive from Q3 2018 onwards, it must be a bitter pill to admit that he needs more funds.
Is it enough? I don’t believe so. With this extra $2 billion alone, I would still see the company running out of money either by or during 2020. That’s using base-case assumptions which I believe are extremely fair to the company.
To put it in context, $740 million of equity is slightly less than what Tesla recognised last year in stock-based compensation expense, and is less than 2019 Q1’s stock-based compensation expense, annualised. So it’s really just a doubling of the company’s “normal” rate of dilution, and is certainly not a comprehensive equity refinancing.
Meanwhile, the interest rate on the proposed $1.35 billion bond issuance is still uncertain, but is unlikely to be cheap. The 5.3% 2025 bond was last seen trading at less than 84 cents on the dollar. This new convertible bond will add yet more leverage to the capital structure, and a higher annual interest bill.
Today’s proposal is, in my opinion, insufficient to solve Tesla’s long-term financing problems, and reduces short-term financial risk only at the expense of an even bigger long-term debt problem. I expect that if this capital raise is successful (which is not guaranteed), Tesla will need to raise funds again before long, or undergo a restructuring.
Wedbush analyst Dan Ives, who has mostly been bullish on Tesla, described the proposed issuance only as a “positive first step” and said on Bloomberg today that $3 billion – $4 billion was really needed.
One thing is for sure: Tesla has been extraordinarily successful, throughout its 16-year history, at raising capital – see the chart below. To me, the company is an enormous pile of wasted and burning capital, created in the midst of an extraordinary tech bubble and lit on fire by the false promises of a cult-like figure. And I believe that it will eventually run out of people who are willing to keep it alive, at least as far as the existing equity is concerned.
At the time of publication, the author has a short position in TSLA and long position in TSLA puts.