Earlier this fall, credit-rating agency S&P Global boosted its rating on Tesla's (TSLA +0.97%) debt, citing the electric-car maker's growing cash reserve relative to its debt. But the BB- rating still left the company's bonds in the "junk" category. This, however, is likely to change soon.
Despite this recent rating upgrade on Tesla's debt, it's already out of date. Since then, Tesla reported better-than-expected third-quarter results with a huge jump in free cash flow. In addition, the company announced a $5 billion equity sale on Tuesday morning -- a move that gives the company significant financial strength.
On top of this capital raise bringing more surety to the eventual repayment of Tesla's bonds, it reinforces the company's ability to maintain its lead in the fast-growing electric-vehicle market.
Tesla's Model S, X, 3, and Y. Image source: Tesla.
A well-timed equity raise
This stock sale couldn't have been better timed. Shares have soared over the past year, rising more than 840%. Further, the growth stock hit an all-time high on Monday, giving Tesla a market capitalization greater than $600 billion. This means a $5 billion capital raise would only dilute Tesla shareholders' ownership by less than 1% yet will increase the company's total cash position by 34%, based on its reported $14.5 billion cash position at the end of Q3.
Not only will Tesla's cash beef up its balance sheet, but it also positions the company to more confidently invest in growth opportunities. The automaker said earlier this year that it planned to double its annual capital expenditures over the next two years as Tesla continues expanding with new factories and begins vertically integrating more battery design and manufacturing.
Tesla has taken advantage of its soaring stock price several times this year. The company has now raised capital three times in 2020.
An enviable position
With trailing-12-month revenue of about $28 billion and analysts estimating that these sales will grow 46% next year, Tesla has already carved out a strong leadership position in the fast-growing electric-vehicle market. A 34% increase to its cash position, however, will make it more difficult than ever for competition to catch up.
Tesla didn't necessarily need more cash. In Q3 alone, quarterly free cash flow was $1.4 billion -- up from $371 million in the year-ago quarter. In addition, the company said in the quarterly update that it "should have sufficient liquidity to fund our product roadmap, long-term capacity expansion plans and other expenses."
But given Tesla's skyrocketing stock price, it seems prudent to significantly increase cash reserves, as it results in minimal dilution with the stock at this level.
Not only will Tesla now be better prepared for any unexpected challenges after it closes its $5 billion equity raise, but management can act more aggressively and with more agility when it comes to investing in the many growth opportunities in front of the company.
