In this Market Foolery segment, host Chris Hill, Million Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman discuss the utterly unsurprising news that Tesla (NASDAQ:TSLA) is issuing $1.5 billion in debt to finance its rapidly expanding operations. Founder and CEO Elon Musk didn't want to dilute the equity of current shareholders, but given the interest rate he may be paying on some of these corporate bonds, dilution may become the lesser of two evils. So how should investors view the stock?
A full transcript follows the podcast.
This podcast was recorded on Aug. 7, 2017.
Chris Hill: Elon Musk said last week on Tesla's conference call that the company would not be doing another equity offering. Today he backed it up, because Tesla announced the company is going to sell $1.5 billion in a debt offering. We knew they needed money, and I think for anyone who takes Elon Musk at his word, if you listened to that conference call last week, it became clear that it was not a question of if, it was a question of when they were going to announce a debt offering, because they weren't going to issue more shares.
Tylor Muckerman: Yeah, they have less cash than they did this time this year, we know they need it, we know they're going to continue to need it. Over half a million pre-orders for the Model 3, that's the kind of production level they're trying to get to it in the next couple years, about 500,000 cars a year, when they're only a little over 100,000 this year. So, definitely some work to do, and the cash burn is a real deal over there.
Jason Moser: Yeah. I think, as we've said, it's a matter of when and not if. With Tesla, it really boils down to, which would you rather have, share dilution or additional debt? Because it's going to be one or the other. And I think at one point or another, I believe that this debt offering is going to involve some junk debt --
Muckerman: Yeah, for the first time.
Moser: -- ratings and junk bond ratings, which is significant in that at some point or another, it's going to become more attractive an option to go ahead and issue equity. So, if you look at it historically, since 2012, Tesla's share count is up about 45%. It's no shock that they're going to have to continue to access the capital markets in one form or another. I think, really, it boils down to, do you believe in this story? If so, how far do you think it will go? Because I can tell you this that what they're doing -- and again, I admire what Elon Musk is doing, and I'm 100% for it but, as an investor, you've got to look at this and recognize the fact that it's going to require a lot of money for a long period of time. Everything these guys do is extremely capital intensive. Whether it's building cars, batteries, Gigafactories, whatever, it involves a lot of money. So, when I look at Tesla as an investment, I'd say the 10-year picture is probably more attractive to me than the three-year picture, because this isn't the last time they're going to have to access capital.
But the flip side to this is that, with Tesla, you have a pretty good window into demand. With the Model 3, for example, they have a pretty good idea of how many they need to build initially. Granted, some cancellations come through. But they have a pretty good idea there of how many cars they need to build, how many people want them. So, that's a plus. Their next step is going to be semi-trucks, according to the letter, and it's not going to stop there. This is a car company, a battery company, a power company. They're trying to do things to fundamentally impact our world for the better. So, there's a psychology in play here that really gives you a stock that's completely detached from the fundamentals of the business, and that's the leap of faith you have to make as an investor. I think with this one in particular, you have to be able to say, I'm OK with holding these shares for the next 10 years, because I know it's going to be a bumpy ride.
Hill: For anyone interested in more on the automotive industry, check out the most recent episode of Motley Fool Money. Our guest was Paul Lienert, who has covered the automotive industry for 30 years. It's always great to talk to Paul. I've interviewed him a few times, and one of the reasons I love talking to him is, he just tells it like it is. One of my questions to him was about Elon Musk and his prediction, which you referenced, Taylor, the whole 500,000 cars in 2018. And I posed my question, and he essentially said, I don't mean to be rude, but your question is moot. [laughs] Essentially, it doesn't matter what he predicts, it really doesn't matter.
Moser: When you look at things like the Model 3, there was this big hubbub made about the first Model 3 being delivered, the Model 3 deliveries coming out. You have to look at that as basically the Dow 21,000. It's a headline, it's a milestone. It doesn't mean, really, anything else. It's a good thing, it's a positive thing, but it doesn't mean game over, it means it's just getting started. I think the market really loves to focus on that because it's a great story, but let's look at the hard work now that's coming up in building a lot of these Model 3s, and further, building semi-trucks, and further than that, completely reshaping our nation's and potentially the world's power grid. It's amazing to think about the things that Musk has in his mind. I would recommend, too, if you get out there on the internet and google up Elon Musk's plan get to Mars, read that thing. It is amazing on so many different levels, but it's really a great window into how he thinks. If you're going to be a shareholder of Tesla, I think you need to have a good idea of how his brain works, and the way he's looking at things.