Tesla Motors, Inc. (NASDAQ:TSLA) announced two major developments recently. First of all, the company officially announced a $2 billion offering of convertible senior notes, of which $800 million will be due in 2019, and $1.2 billion will be due in 2021. The second big development was the official announcement of Tesla's Gigafactory, a huge manufacturing endeavor that will allow the electric-car company to achieve "economies of scale and minimize costs through innovative manufacturing, reduction of logistics waste, optimization of collocated processes and reduced overhead." What do the two have to do with one another and how does this affect investors?
Tesla had about $840 million in cash and cash equivalents at the end of last year. Considering that the company didn't have nearly enough cash on hand in 2013 in order to honor its commitment of investing $2 billion into the Gigafactory, Tesla decided to offer convertible notes, as outlined below:
|Year||Rate||Initial Offering||Option||Potential Total||Conversion Price|
|2019||0.25%||$800 million||$120 million||$920 million||about $360|
|2021||1.25%||$1.2 billion||$180 million||$1.38 billion||about $360|
When all is said and done Tesla will have enough money to build its massive Gigafactory. The factory, once it is up and running in 2020, will be able to outproduce the rest of the world's combined 2013 lithium-ion-battery production. If the underwriters choose to exercise their option to purchase more of the offered notes, Tesla could have a surplus of about $300 million, for a total of $1.14 billion, including 2013's cash.
Tesla has big plans for this huge battery production endeavor, which will enable the electric-car company to produce its Gen III, mass-market vehicle at an affordable price point. The company sees "an opportunity to leverage [its] projected demand for lithium ion batteries to reduce their cost faster than previously thought possible." Tesla projects that by the time their Gen III vehicle production launch ramp takes place, battery pack cost per kilowatt hour will be reduced by a whopping 30%.
Three years and counting
Around 2017 we're going to see a new generation of Teslas, and a huge reduction in battery cost. We're also likely to see current shareholders diluted when these notes are converted. But the Gigafactory production potential, paired with the fact that Tesla will be commercializing battery packs for residential power generation, negates any concern regarding current share dilution.
Knock it out of the park
Tesla's stock price has a lot baked into it, but the potential that the Gigafactory could have on the company's future is hard to quantify. Especially when you consider the company's intention to "start selling stationary energy storage products for use in homes, commercial sites, and utilities. The applications for these battery systems include backup power, peak demand reduction, demand response, and wholesale electric market services." The growth implications of Tesla commercializing battery packs, combined with the production capabilities of the Gigafactory, along with gaining a nice cash surplus are huge.