(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)
On August 7, Tesla Inc. (TSLA) proposed issuing $1.5 billion in senior notes. By August 11, Tesla was able to sell $1.8 billion of senior notes due in 2025 at a rate of 5.3 percent. This is a company that already has long-term debt of nearly $7.1 billion as of June 30, 2017, and burns through cash on a quarterly basis. The latest the capital infusion was to strengthen the company's balance sheet for scaling up the Model 3 launch. Apparently, most investors in both the equity and bond market believe in the Tesla story.
The offering was just another in the latest string of offerings, and the strength of the most recent debt offering gave Tesla the ability to upsize the deal by 20 percent. As a result, the stock reacted favorably to the news for a couple of reasons.
First, it removes the risk, at least for now, of another equity offering. Second, it gives the company the cash it needs to continue ramping up its Model 3 launch. Finally, it continues to show that Tesla can come to the market when required to raise the capital necessary to fund operations moving forward.
Based on its second-quarter results, the company had cash of about $3 billion as of June 30, 2017. With the latest offering, that cash hoard should be approaching $4.8 billion. Based on the company's second-quarter cash burn rate, that should give Tesla enough cash for three to four more quarters.
The company in first half of 2017 invested nearly $1.5 billion in capital expenditures, with a net used in investing activities of roughly $2.14 billion. The company in its latest guidance revealed it expects to spend another $2 billion on capital expenditures in the second half of the year.
No Dilution For Now
The road for Tesla is still bumpy, and the stock will continue to be volatile. But one significant overhang has been removed for now, which is the risk and fear of dilution due to the heavy need for cash to fund operations. But if Tesla is successfully able to come to the market and issue debt in the future as opposed to having to issue equity, it would be a huge relief to equity investors and remove some of the dilutions that discount the stock price.
The successful debt offering, coupled with the solid second-quarter results, are the driving force behind the stock's 12.5 percent rise in August. And Tesla still has enough cash on hand potentially for the next few quarters. The only thing standing in Tesla's way now is building the Model 3's and getting them to out to customers.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.