Morningstar | Tesla's First Capital Raise Since 2017 Not a Surprise
Tesla CEO Elon Musk reversed course regarding raising capital on the firm's April 24 earnings call by saying there was merit to the idea. Tesla filed with the SEC on May 2 to raise as much as $2.3 billion in convertible bonds and stock. We are not changing our fair value estimate and think the move was prudent given Tesla's March 31 cash balance declined by about $1.5 billion from year-end to $2.2 billion. The capital raise should also improve negative sentiment in the market that recently pushed the stock below our fair value estimate, which we think is why the stock is up on May 2.Final pricing terms of the deal are not yet determined, but the dilution was insufficient to cause a valuation change. Tesla seeks to issue $1.35 billion ($1.55 billion if fully oversubscribed) of senior unsecured convertible notes due in May 2024 and $642.3 million ($738.7 million if fully oversubscribed) of common stock. Musk intends to buy about $10 million, or 41,896 of the as much as over 3.1 million shares issued. The SEC filing assumes the last closing price for equity issuance of $238.69 but we expect the deal to price in the $240s range and to be oversubscribed.
Tesla's share count is still below 200 million shares, a small number compared with other automakers. Tesla is also a young company, and we think the market would forgive greater dilution than this deal entails. We also are concerned about Tesla's debt levels, so we prefer Tesla just issue equity. We estimate after this deal Tesla's recourse debt will total about $8.3 billion, and the company has about $566 million of legacy SolarCity convertible debt due this November that will almost certainly have to be paid in cash given the bond's conversion price of $759.36 per share. We'd like to see Tesla do a large equity offering to raise several billion dollars and completely remove cash burn concerns longer term. We'd especially like to see this if the stock got close to $400 per share as it did in 2018.
Tesla designs, develops, manufactures, sells and leases electric vehicles and energy generation and storage systems, and provides services related to its products. The company operates as two reportable segments: automotive, which includes the design, development, manufacturing, sales, and leasing of electric vehicles as well as sales of automotive regulatory credits; and energy generation and storage, which includes the design, manufacture, installation, sales, and leasing of solar energy generation and energy storage products, services related to such products, and sales of solar energy system incentives.
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