To meet a goal of raising production to 500,000 vehicles by 2018, Tesla Motors is going to need billions, and will likely have to sell stock yet again.
According to an analytical look by Automotive News, the automaker which is promising the Model 3 by late 2017, must run the risk of diluting its share price in exchange for more greenbacks and liquidity.
Tesla head Elon Musk has said that capital spending will need to increase by 50 percent, or $750 million, compared to what was originally budgeted for this year.
Tesla is America’s smallest and youngest publicly-held automaker, and Automotive News – citing Barclays analyst Brian Johnson – says it’s facing its biggest stretch goal in its history. Tesla will need the money also to bring its “Gigafactory” battery plant up to full production, as well as expanding its sales and service departments. Cash-consuming projects also include global plans to install more superchargers, hiring more manufacturing executives, and possibly looking to adding more capacity for vehicle assembly.
Johnson highlighted his observations that Tesla was a like a “startup unicorn.”
“With its ambitious plans that will require an incremental fundraising, we view Tesla as more of a cash-hungry startup unicorn than a traditional public company,” Johnson said in a research note. “With Tesla likely to come to the market for a capital raise near-term, it’s worth asking whether it deserves an up round or a down round.”
Johnson said Tesla would look for a $3 billion equity raise at some point during the second quarter. Based on current stock prices, that would result in an 11 percent increase in outstanding shares.
Tesla has raised capital six times in the past four years. The company was initially quiet after its 2010 initial public offering, which raised it $226 million. It raised another $222 million in October 2012; and another $1.08 billion in May 2013 (which allowed it to pay a $465 million loan from the Energy Department nine years ahead of time). Subsequently, it borrowed $2.3 billion in convertible debt in February 2014 to spend on the Gigafactory construction. In June 2015, Tesla took out a credit line of $750 million, and the company sold 3.1 million shares in August 2015 to raise another $738 million.
Musk remains the company’s biggest shareholder, at about 22 percent.
During its first-quarter earnings release last week, Tesla said it had $1.44 billion in cash and cash-equivalent holdings as of the end of March. That’s an increase of $1.19 billion from three months earlier, but long-term debt is up to $3.12 billion from the $2.65 million at the end of 2015.
Musk and Tesla said it used money from the line of credit, most of which was paid back. Tesla said that money generated in pre-orders for the upcoming Model 3 mostly came in after the close of the quarter, and wasn’t useful for investing in capital.
“I don’t think we want to rely too much on customer reservation money as a source of capital,” Musk said a call with analysts to discuss first-quarter earnings. “Maybe there is a buffer or something, but it’s not as a primary source of capital. I think it’s going to make sense for us to raise some amount of money — some combination of equity and debt — and make sure the company has a good buffer of cash on hand. I think it’s important for de-risking the company.”
Tesla has faced liquidity problems before, observes the analysis piece, so the company is taking steps to avoid that happening again if there are challenges such as production delays. Especially since the company started 2016 thinking it would to spend $1.5 billion on capital expenditures, before bumping that number up to an expected $2.25 billion, as Tesla attempts to grow from a niche player to a volume automaker on the strength of the Model 3.