Debt could be wiped out leaving it stronger financially
Thursday 16 Jul 2020 Author: Steven Frazer

Shares in Tesla have been on a tear this year, rallying right through the Covid-19 pandemic to close at record highs of $1,544.65 on
10 July, posing the question of whether the company should take the opportunity to raise
more cash.

At that price the stock had already jumped almost 43% in July alone, and is 269% higher so far in 2020. The Elon Musk-run firm is now the most valuable car company in the world.

At $277.5 billion it is worth as much as Toyota, Ford, General Motors and Fiat Chrysler put together.

This valuation puts stock on an astonishing next 12 months price-to-earnings multiple of 180.5, according to Refinitiv data.

Investors will continue to argue over the relative merits of the electric car and energy technology company, whether discounted future cash flows are the right way to value it, and if not, how else to do so.

But most investors would agree that companies should raise fresh funding when they can, not when they need to, and that could put a big stock offering on the agenda for Tesla.

A share placing could completely wipe all the debt off Tesla’s books as well as leaving a giant pile of cash to fund operations and expansion years into the future. This would undermine some of the key bear arguments against the stock.

About 7.5% of Tesla’s shares are currently in the hands of short-sellers, aiming to profit from falls in the share price, a painful position to be in so far this year.

By offering up to 5% of the current 184 million shares in circulation, about 9 million new shares, at $1,400 (a rough 6.7% discount) Tesla would raise approximately $12.5 billion. This would limit dilution of existing shareholders at a time when there is evidently immense appetite for the stock, and provide huge financial firepower to support its growth plans.

Net debt is forecast at around $4.14 billion by the end of this year, taking account of a $2.3 billion stock offering carried out in February, although it is possible Covid-19 will impact this estimate. Tesla had $7.15 billion of net debt at the end of 2019.

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