I have a question. It seems to me from reading on this board that the capital raise is potentially the single most important factor in the near term, at least until we get delivery numbers for Q2 in early July.
Obviously, Tesla needs a large amount of money on the order of several billions to fund the Model 3. Here are the possibililties I see:
1. Elon chooses to do a capital raise now. The share price is roughly 207-208 ish which is lower than the 242 SP on the last capital raise. This would represent a "down round" which would dilute shareholder value. As far as I know, Elon has never done this before in any of his companies. Do you see this as a possibility? Why didn't Elon raise before the Q1 CC when the stock price was approaching $270? Do you think he thought that the share price would increase after the revelation of a goal of 500K cars in 2018. Or does he have another plan?
2. Elon chooses to wait till after Q2 delivery numbers which, if good, could elevate stock price. Do you think this is a possibililty or is it too risky given that macro situation could crash and share price could actually drop further.
3. Elon sells a minor stake in the company to a big player (e.g GOOG). Is this a possibility? Elon is of course good friends with Sergei and Larry. Tesla's CFO is from GOOG. A minor investment in Tesla would allow Elon to keep control and allow GOOG to put their money to a good use with potential for high reward. As you know, Larry Page once said he should give all his money to Elon when he dies. A 3 billion investment is a small amount of money for GOOG but would turn this ship around in no time. Most importantly, it would provide TSLA with an extremely powerful ally which, in my opinion, may be necessary to combat large interests such as oil, car dealers, car makers, etc. I believe this would also send a signal to the shorts that Tesla will survive and fluorish and most will cover immediately leading to short squeeze.
Related question: If a large company takes a minor stake in Tesla, does this have to occur at the current share price or could they do it at a higher price (say 250 or 300) and avoid a down round of financing. Obviously, when companies completely buy out other companies, the acquisition price is typically higher than the share price. Does this also apply for minority stakes? Of course, the price will go much higher just on announcement of such a partnership.
I thank you in advance for your insight.
Great post, I agree with most of your thoughts. Here's a few things I can add onto your points:
1. I agree that Elon is definitely trying to avoid a "down round" of funding, because that would be his first in over 20 years of managing multiple companies. I believe that he came to the conclusion that Tesla will advance their 500K delivery target by two years in the week or two following the Model 3 reveal, when the stock was above $250. He probably thought announcing that Tesla is now doubling their already courageous goal would help boost the stock even higher, which of course it did not. He now may be hesitant to raise capital at these levels.
2. I think Tesla set the bar relatively low with the 17K Q2 delivery guidance partly so that the stock has another positive catalyst, but mainly to regain credibility in regards to guidance. They need to remind the market that they have underestimated both demand and production schedules in the past, and that they can actually exceed projections, rather than coming up short every time. Gaining the market's trust will be the single biggest mover of the stock in the next year or two.
3. A larger company taking a minority stake in Tesla is a very ideal scenario, but I just don't see who it would be. Like you said, Google is realistically the most plausible, given Elon and Larry's friendship and Google's history of investing in long-term projects with potentially high returns (i.e. SpaceX and SolarCity). I do not think this will happen simply due to a conflict in interest. Just my opinion here.. but I think Google has been spending years and tons of capital on autonomous technology to disrupt the service industry. Their autonomous technology is too expensive to become mass-market, but would still prove to be a great investment if they can reap benefits from ride-sharing or possibly commercial trucking objectives. I think Tesla is also aiming to go after these industries, which is why they are the only one of Musk's companies they haven't invested in. Apple is in the same boat - conflicted interests. I hope I am wrong and Google steps in with a big investment, but that is probably wishful thinking.
4. Simple answer to your follow-up on minority investments: Yes. Although it's not a minority investment, GM bought Cruise Automation just a couple of months ago for over $1 billion when the company was last valued at only $100 million
Cruise Automation Looks to Expand. It's harder to find premiums for minority investments, but it is possible. Getting a large and successful firm to invest in Tesla at a premium would give investors an enormous amount of confidence.
IMO the best possible fundraising scenario is as follows:
-Tesla closes a debt deal, worth $1.5B, with amazing terms that they would never have received without the outstanding M3 reservations.
-Tesla announces over 500K total reservations at the stockholders meeting on May 31. They probably saw a spike in reservations after announcing that new reservation holders have a good chance at getting their car by 2018 and don't want to miss out on any tax credits.
-By now, the downward trend is reversed and the SP is moving up rapidly. A large company sees a massive opportunity to invest at these levels and doesn't want to miss out before the stock gets too high - they invest $2B for a 5% equity stake in Tesla.
-The company now has an enormous cash balance and got there quickly without seriously diluting shareholder value. The market now sees Tesla as less risky and more credible with their guidance as they continue to execute, which sends the stock to an ATH. They then raise another $1.5B from the public markets after the stock stabilizes in a new trading range above $300.
So including deposits, remaining ABL, and current cash balance, Tesla would have around $7 Billion in cash on the balance sheet - an entirely different scenario from where we are today. I know Tesla said they don't want to rely on deposit money as a source of cash, but they still can if they want to. This is of course just a dreamy best-case scenario, but one that's not entirely out of the question.
