After raising $5 billion in fresh capital in September, Tesla (NASDAQ:TSLA) is returning to the capital markets yet again for another $5 billion just three months later. The electric-car maker is taking advantage of the meteoric rise of Tesla shares, which are up nearly 700% so far this year. Tesla's market cap has now topped $600 billion, a massive premium compared to any other automaker by just about any measure.
Here's why it's smart for Tesla to beef up its balance sheet.
Less than 1% dilution
Tesla has filed a fresh shelf registration statement, detailing its plans to raise another $5 billion. A shelf registration allows a company to issue and sell shares at its discretion, giving it greater flexibility over the timing. The offering in September was also conducted pursuant to a shelf registration.
While Tesla has made undeniable progress in recent years in improving its financial performance -- the company is consistently generating positive operating cash flow and free cash flow -- the soaring stock price has put shares in unprecedented valuation territory. The stock trades at 21.6 times sales, unheard of in the automotive sector. Toyota trades at just 0.8 times sales.
Considering the $1.9 billion in free cash flow that Tesla has generated over the past four quarters -- including a record $1.4 billion in free cash flow in Q3 -- the company arguably doesn't need to raise cash right now. But with Tesla stock fetching an insane premium, existing shareholders face negligible dilutive costs, and bolstering the cash by this much reduces the financial risk on the balance sheet.
Even CEO Elon Musk suggested that Tesla shares were "too high" earlier this year. The stock has gained over 450% since then.
Tesla stock price is too high imo— Elon Musk (@elonmusk) May 1, 2020
Tesla estimates that it will have approximately 955.6 million shares outstanding after the offering, compared to the 947.9 million shares it had as of Oct. 20 -- translating into just 0.8% dilution for current investors. That's a minimal cost, and adding $5 billion will bring Tesla's total cash position to nearly $20 billion before factoring in cash flow performance in the fourth quarter.
What Tesla wants all that cash for
The company is in the process of expanding Model Y capacity at its Gigafactory in Shanghai, and construction is ongoing at similar facilities in Berlin and Texas. Tesla has increased its capital expenditure guidance by $2 billion to $2.5 billion, and now expects to invest $4.5 billion to $6 billion in each of the next two years to support future growth.
Additionally, the rising stock price has led to another inadvertent consequence: Much of Tesla's convertible senior notes are now convertible at the discretion of the bondholders. While Tesla can choose how it pays back that debt (cash, stock, or some combination thereof), conversions would require some form of capital outlay.
Even though CFO Zach Kirkhorn said that the company already had "ample liquidity and expected cash flows to fund" its capital needs, an extra $5 billion doesn't hurt.