Elon Musk’s capital-hungry Tesla Motors is gearing up for another stock sale, and it could be the electric car maker’s biggest yet.
Revealing aggressive plans to accelerate car production to 500,000 vehicles a year by 2018 instead of its 2020 previously, Musk told analysts Wednesday it would make sense to Tesla to raise “some combination of equity and debt”.
This would make sure the company has enough of a cash buffer while it ramps up production, the Tesla founder said.
“I think it’s important for de-risking the company,” Musk said in response to an analyst question about the car maker’s capital plans.
Morningstar analyst David Whiston is modelling Tesla to raise US$1.5bn in equity and US$1bn in debt, though he conceded in a note to clients there was much uncertainty as to how much capital the company needed to meet its “hyper-ambitious” targets.
UBS analysts Colin Langan and Eddie Hsieh, who have a sell on Tesla stock, estimated the company needed US$2bn of equity, implying 7% dilution, to fund the production ramp.
In recent trading Thursday, Tesla fell 4.7% to US$212.13, also below the stock’s all-time high of US$286.65 set in July last year.
Tesla has about US$400m flowing into its coffers from customer deposits for its Model 3 mass-market model slated for delivery in late 2017.
The company drew lengthy customer lines when it started taking orders at the end of March, attracting 325,000 orders in the first week alone and equating to US$14bn in future sales.
But Musk said Tesla did not want to rely on customer deposits to fund its operations.
“Maybe it is a buffer or something but not a primary source of capital,” he said.
Musk’s comments mark a departure from the company’s stance on outside financing this year.
Pivot on growth
In his shareholder letter on February 10, he said the company planned to fund about US$1.5bn in capital expenditures this year “without accessing any outside capital” other than its asset-backed line (ABL) to support leases directly funded by Tesla and growth in finished goods inventory.
Tesla has raised equity in each year since it went public in 2010 at US$17 a share, the most recent being a US$750m follow-on last August that saw it sell 2.7m shares at US$242.00 each. The company has also raised convertible equity on several occasions.
A challenge for Musk is recent share price pressure, while Tesla remains a heavily shorted stock with several high-profile hedge fund managers lined up against him. According to Thomson Reuters data, short interest in the stock represents 21.7% of outstanding.
The high level of short interest is also a challenge for further convertible financing, given convertible arbs funds typically need to short sell stock to hedge their positions.
Musk was speaking Wednesday on the company’s first quarter earnings call, which also saw the company affirm plans to deliver 80,000 to 90,000 new cars this year, comprising production of its existing S and X models.
Telsa reported a 45% increase in non-GAAP revenue to US$1.6bn in the first quarter and said it was nearly breakeven in terms of cash from core operations. On a GAAP basis, operating cash outflows were US$250m.
With Wednesday’s decision to advance its production run rate to 500,000 cars, essentially a doubling the prior growth plan, Musk also expects capital expenditures this year to “about 50%” above Tesla’s previous guidance of US$1.5bn for 2016, or about US$2.25bn.
This would impact Tesla’s ability to be net cash flow positive for the year but investing to meet demand for Model 3 vehicles was the best long-term decision for Telsa, Musk said in his latest shareholder letter.
Tremendous demand for Model 3
Tesla finished the last quarter with US$1.44bn in cash and cash equivalent but this doesn’t include any meaningful cash flow from the Model 3 customer deposits.
Musk said the new production target was based on “tremendous demand” for the Model 3, “which I think is actually a fraction of the ultimate demand when people fully understand what the car’s capable of and are able to do a test drive”.
Tesla’s new production target for 2020 was for volume closer to one million vehicles, he said.
Raising some question marks about Tesla’s ability to meet the production targets, Tesla is replacing its head of production, Greg Reichow, who Musk said was still at Tesla but “helping with the transition to some new leadership”.
Asked what Telsa had to do convince naysayers like hedge fund manager Jim Chanos of Kynikos Associates, who is short Tesla stock, he said there was always going to be naysayers.
”What I find ironic about the naysayers is the very same people will transition from saying it was impossible to saying it was obvious,” he said. “I’m like: ‘Wait a second’. Was it obvious or impossible? It can’t be both.”
Chanos has questioned Tesla’s inability to forecast its deliveries one quarter out and cast doubt on the company’s battery products and gigafactory under construction in Nevada.
