I last wrote here about Tesla (TSLA) on March 1st. Back then, after the company announced cuts to sales and marketing staff, I said that investors should take that, and the market’s reaction to it, as a warning and sell the stock. Now, two months later, and twenty percent lower, Tesla is once again doing its trick of defying logic, but don’t be fooled. The “good news” that has caused a small bounce in TSLA is anything but.
Under normal circumstances, when a company issues stock and/or takes on additional debt, the stock price, logically enough, drops. Selling stock dilutes the value of existing holdings, and debt has to be serviced, which hurts cash flow, and at some point, repaid. However, nothing to do with Tesla ever comes under the heading of “normal circumstances”.
On Thursday morning, Elon Musk announced that, even though he had said just a few months ago that Tesla was done with raising capital, they would be offering $650 million in common stock and $1.35 billion in convertible senior notes due in 2024. As mentioned, the logical reaction to that news would be a slight decline in the stock, but instead, TSLA did this…
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The only explanation for that is that there was a sense of relief that the company had raised some more money, but if you think about it, that is a terrible reason to buy the stock. If the raising of a couple of billion dollars causes so much relief that even the diluted stock becomes worth more, what does that say about the company’s position before the announcement? Tesla’s ability to raise money has never really been in doubt; it is their ability to make money that still needs to be shown.
I understand that there are lots of reasons to root for the company. They are often seen as the plucky little upstart, taking on both big oil and big auto, and Musk is viewed by many as the anti-establishment hero refusing to play by the rules. As I said back in March, though, fund managers don’t really care about that. They have more of a “show me the money” attitude, and while this capital raise gives Tesla some breathing space, it doesn’t alter their profitability.
At some point, as Musk says, the move towards autonomous vehicles will come, and Tesla’s early adopter advantage in that area will pay off; The problem, though, is that the longer it takes to get to that point, the more likely it is that others will catch up and the less that advantage becomes.
Still, there will come a point when TSLA is a great long-term investment. They make high-quality vehicles that buyers generally love and resistance to the idea of an all-electric, self-driving car is dying quite rapidly. We are, however, not yet at that point, and until they show the ability to make money consistently, the stock is most likely to resume its downward path and holding off still looks like the smart thing to do.