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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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Tesla - $2 billion secondary offering

Updated: Jul 19, 2020

This is a very quick post regarding one of my favourite companies - but least favourite stocks (and I’ve been wrong, wrong, wrong!) - Tesla (NASDAQ: TSLA). I do not presently own the shares or options on the shares.

Although Elon Musk said that Tesla would not raise capital just two weeks ago on the 4Q2019 earnings call, he has obviously changed his mind. The company announced this morning that they would do a secondary offering of $2 billion, offering 2.65 million shares to the public. If I understand the offering correctly, this value the shares at $754.72/share. There is also a $300 million green shoe. Elon Musk has said he will buy $10 million and Larry Ellison (Board member) will buy $1 million of the offering.

According to Yahoo Finance (all data came from this source), the company has around 180.24 million fully-diluted shares outstanding. The market cap of Tesla’s equity at yesterday’s close ($767.29/share) was $138.3 billion.

This morning post-announcement but pre-open, Tesla fell to below $740/share, but is rallying from this level this morning, now at $758/share just after the opening. The post-issue value of the company assuming an additional 2.65 million shares will be $138.6 billion, slightly above the market cap at yesterday’s close. (The new offering represents approximately 1.48% of the company’s post-issue shares outstanding.)

So what do I think? Let me first reiterate my view – so far wrong – that Tesla is over-valued. Its price is not supported by its fundamentals. However, I absolutely think that Tesla is doing the right thing by issuing shares. From a corporate finance perspective, it is right from the company’s perspective to sell shares when the stock is undeniably fully valued and investors are receptive. Yes, it’s true that Mr Musk said one thing only two weeks ago and is now doing something different, but investors should be aware of his history in this respect. And in any event, he has a right to change his mind. Moreover, Tesla will add to its liquidity, improving its cash position to between $8.25 billion and $8.5 billion, a very good idea given that the company is still losing money and has ambitious expansion plans. Elon Musk and Larry Ellison are stepping up, showing their ongoing conviction and belief in the value of Tesla. The one negative I suppose from the company’s perspective (and a real pet peeve of Mr Musk) is that this offering will put more shares in the market to help the money-losing shorts close out their positions, but the amount of shares being issued is peanuts since there are still 22.75 million shares held short (roughly 16% of float/ 1.5% daily volume to cover). The short interest is working its way down ever so slowly, and the sooner there is some balance, the sooner investors can focus again on Tesla’s fundamentals (rather than technical drivers).

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