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Tesla
is taking advantage of strong demand for electric-vehicle stocks and plans to raise billions in a nonstandard stock sale. On Tuesday, the EV behemoth said it plans to raise up to $5 billion in an “at the market” stock offering being led by
Goldman Sachs.
The company plans to use cash to “further strengthen our balance sheet, as well as for general corporate purposes,” according to the prospectus. That is standard language. More specifically, Tesla (ticker: TSLA) might use the money to build additional manufacturing capacity. Its next plant is planned for Austin, Texas. Currently, Tesla has facilities in California, Nevada, and Shanghai, as well as one under construction in Berlin. The company wasn’t immediately available to comment on future capacity plans.
The offering is a little different than other stock sales. “At the market” means “investors who purchase shares in this offering at different times will likely pay different prices.” There is no one block of stock being allocated by bookrunners.
That is a bad sign to some. GLJ analyst Gordon Johnson believes it’s a sign that institutional demand is drying up for Tesla stock, and that retail investors are driving the offering. “If they need the cash, that’s a problem with the story,” Johnson tells Barron’s.
It’s a bearish take, but Johnson is indeed a bear. He rates Tesla Sell and has a mere $17.40 price target, the lowest target price on Wall Street for a stock that trades around $500. Not everyone feels as Johnson does. New Street Research analyst Pierre Ferragu is fine with the capital raise.
“At these levels, it is more or less free money,” Ferragu tells Barron’s. It’s a good idea to raise capital when companies can get it.
“Why not raise $20 billion?” asks Ferragu rhetorically. “They don’t want to upset their shareholders either.” The amount being raised is a fraction of Tesla’s market value. The dilution, according to the analyst, is easy for the market to digest.
Ferragu rates shares Hold, with a price target of $300. Wedbush analyst Dan Ives rates shares Hold too, with a $380 price target. Ives falls on the side of Ferragu, believing the raise is a good idea. “This is the smart move at the right time for Musk & Co. after the parabolic rally in shares,” wrote Ives in a Tuesday research report.
Tesla stock closed down 4.7% on Tuesday. That is a typical response to a stock sale. Cash comes in the door, but investors are forced to share future gains with new shareholders. Stock in
NIO
(NIO), another EV company recently raising money, dropped roughly 4% in the aftermath of its plan to raise capital, announced last week. NIO’s share sale was completed Monday.
Tesla stock might not stay down for long. Shares have been on fire lately, rising almost 66% since the end of July and about 468% year to date. Both returns far exceed comparable numbers for the
S&P 500
and
Dow Jones Industrial Average,
as well as for traditional automotive peers.
The entire EV sector, in fact, is on fire. The EV stocks Barron’s tracks are up more than 300% year to date on average. The rally has been catalyzed, in large part, because of Tesla’s success. The company has produced a string of better-than-expected delivery and earnings results, propelling shares higher.
Many EV companies beyond Tesla have used the strong market to raise money.
Li Auto
(LI) and
Xpeng
(XPEV) recently sold stock in initial public offerings. Fisker, Canoo, and Lordstown Motor are merging with SPACs, or special purpose acquisition companies, to raise development capital. Those are all light-vehicle makers.
Nikola
(NKLA) and Hyliion are two commercial-vehicle makers raising money in 2020 as well.
EV technology has made great gains recently—a fact reflected in stock prices. Still, investors should be a little wary of all the capital flowing into the sector—it can be a sign of a market top. That doesn’t necessarily mean a dip will come; recent gains could also be consolidated with the sector trading sideways for a while.
Of course, another possibility is that shares keeps rising. It has certainly been tough to bet against EV stock in 2020.
Write to Al Root at [email protected]