For the first time in a while, Tesla (TSLA) appears to be setting the table for raising capital as the company added a note in its quarterly SEC filing saying that they “may choose to seek alternative financing sources.”
About a year ago, CEO Elon Musk made a public push for Tesla to become profitable and sustain itself from its own operating cash flow.
It worked for the last two quarters of 2018, but Tesla returned to a loss in the first quarter of 2019.
During the conference call following the release of Tesla’s financial results, Musk did open the door to a capital raise:
“At this point, I do think there is some merit to raising capital. This is sort of probably about the right timing, but yes.”
The CEO had previously shut down suggestions of Tesla raising more capital.
Following Musk’s comments, Tesla also noted that they may seek “financing sources” other than the cash flow from their core operations:
“Moreover, we expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations, although we may choose to seek alternative financing sources.”
But the company didn’t specifically mention raising capital on the market like Musk.
Instead, Tesla referenced its debt financing for Gigafactory 3 in Shanghai as an example:
“For example, we expect that much of our investment in Gigafactory Shanghai will be funded through indebtedness arranged through local financial institutions in China, including a RMB 3.5 billion term facility that our subsidiary entered into in March 2019. As always, we continually evaluate our capital expenditure needs and may decide it is best to raise additional capital to fund the rapid growth of our business.”
Nonetheless, financial analysts are seeing this as the first sign of Tesla preparing to raise more capital.
We have been saying that Tesla should go back to the financial markets for a while now despite Elon’s comments about it.
That said, it would have been a lot better to do it 3 months ago.
Now it looks like Tesla is doing it from a position of weakness, but it would likely still be worth it.
During the conference call, Elon made an interesting comment about why he was reticent to raise more capital before:
“I don’t think raising capital should be a substitute for making the company operate more effectively. So that in that sense, I think it’s important to have strong financial discipline and just make sure we don’t have extraneous expenses and we’re just being frugal with capital. If we keep raising capital every time, then we now have the forcing function of improving the functional operation of the business.”
The problem with this statement is that it is obvious. You shouldn’t use capital raising as an excuse not to be capital efficient.
Everyone agrees on that, but it doesn’t mean that you can’t go to the market if you need help paying for massive projects, like the many that Tesla is currently working on.
I think investors would be willing to pay for it if Tesla presents a capital raise as a way to accelerate the company’s growth, which is the most important thing for its mission to accelerate the advent of sustainable transport.
What do you think? Let us know in the comment section below.
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