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Tesla Does the Right Thing at the Wrong Time: Liam Denning


May 2, 2019, by Liam Denning
(Bloomberg Opinion)

It is said Americans can be counted on to do the right thing, after they’ve tried everything else. And so it goes with news that Tesla Inc. seeks to raise up to $2.3 billion from selling new stock and convertibles.

To be clear: A company that burned almost a billion dollars in the first quarter — and would have burned much more had it not underspent versus its capex budget or relied on selling a hoard of greenhouse-gas credits — should at least consider raising more money. Especially when that company’s stock trades at 37 times adjusted estimates for next year’s earnings.

But cast your mind back all the way to … nine months ago. On Aug. 1, 2018, Tesla’s stock closed at just over $300, or 29 percent above where it closed Wednesday and 150 times the following year’s earnings at that time. That evening, speaking with analysts after announcing the company’s second-quarter results, CEO Elon Musk had this to say when asked about the company’s capital needs:

We do not — we will not be raising any equity at any point, at least that’s — I have no expectation of doing so, do not plan to do so. For China, I think, our default plan will be to use essentially a loan from the local banks in China and fund the Gigafactory in Shanghai with local debt, essentially. And we certainly could raise money, but I think we don’t need to and we — yeah, I think, it’s better to — it is better discipline not to.

Rather than choose that moment to raise capital, within a week Musk was instead tweeting about a nonexistent take-private deal that sent the stock soaring to almost $390, before reality and the Securities and Exchange Commission quickly intruded. As recently as last week’s earnings call, Musk was still noncommittal about the idea of raising capital and still talking about “discipline” on that front.

By Thursday morning, discipline had clearly given way to something else and the prospectus was out. It seems odd that this would happen despite the stock having just closed at its lowest level in more than two years, until one begins to entertain the notion it is happening precisely because of that fact. Whereas nine months ago, raising capital would have been seen as a boost to the P&L statement, today it comes across as mortar to repair the balance sheet.

That Tesla is raising a couple of billion dollars or so blunts some of the more apocalyptic bear scenarios centered on its stretched balance sheet. But it by no means negates them. That’s in part because the hole to fill is now so large. As I wrote here, the sharp reversal in growth in the first quarter underscored Tesla’s reliance on negative working capital, which still stood at $1.6 billion at the end of March.

Perhaps more importantly, the fact that Tesla has now decided to seek finance after holding off for so long and with the stock where it sends a jarring message. Only last week, the narrative on the earnings call was that the first quarter was essentially an aberration, with growth targets reaffirmed and positive free cash flow due in every other quarter of the year. Even if raising money is right, the timing makes it feel all wrong.



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