Tesla - Dr. Dilution, Or: How You Learned To Start Worrying And Hate The Capital Raise

| About: Tesla Motors (TSLA)

Summary

Management's inability to forecast a path to profitability in the next few years points to more capital raises.

Tesla's market cap keeps increasing, but share price does not keep pace.

Even if the company achieves its goals of altering transportation and energy storage, shareholders may not benefit.

Following the fourth quarter Tesla (NASDAQ:TSLA) conference call, analysts quickly keyed in on the fact that another substantial capital raise (by equity issuance) will follow in the next few months. Tesla simply doesn't have the cash to keep operations going into the second half of this year, with (as of the end of last quarter) only ~ $400M more current assets than current liabilities. At a burn rate of at least $100M a quarter, that's probably already dangerously close to zero. Of course, with an astronomically high stock price, Tesla is well-poised to issue more equity to raise cash to continue operations - that shouldn't really ease the minds of shareholders though.

What has this meant in the past? Since hitting its highs in 2014, Tesla shares outstanding have grown from ~125M to over 160M, as seen below. The proceeds from these equity sales have allowed the company to continue on its growth trajectory, shoveling ever more cash into the capex furnace while operating losses continue.

TSLA Shares Outstanding Chart

Why is share dilution so important? As a growth stock that pays no dividends, the only avenue for investment return is to grow the price per share. Unfortunately, share dilution can act to decouple the share price from the market capitalization of the company. As the size of the company (as measured my market cap) increases, the share price will greatly lag behind. From IPO to now, the market cap of Tesla has increased more than 2000%. However, the price per share has only increased 975%, with all of the lag being due to the issuance of new shares:TSLA Chart

I grant you, any investor would have been quite happy to have bought shares in 2010 and seen the share price appreciation of the past sevenyears - any effects of dilution haven't really been felt too strongly because the share price skyrocketed along with the market cap. However, that has begun to change in the last few years: since hitting its highs in September of 2014, Tesla shares have actually decreased ~10% while both the market cap and enterprise value (market cap + debt - cash) have increased substantially.

TSLA Chart

This last graph is what should scare Tesla investors the most. Leaving aside the bear arguments that Tesla doesn't make money, isn't sustainable, requires subsidies, et cetera, the fact still remains: as Tesla grows in size, its stock price may not appreciate. Over the past three years, the size of the company (its enterprise value) has increased by nearly a third, while owners of its common stock have lost 10% of their investment.

Assuming Tesla raises $2B in equity this year, the market cap will increase by another ~5%, while the stock price languishes below all-time highs. Furthermore, there seems to be little end in sight for the capital raises. With huge capital expenditures required to begin model 3 production, expand service centers, and build more superchargers, Tesla will (by necessity) have to raise capital for years to come. The only way to avoid capital raises would be to moderate growth and start milking current operations for cash, which would be a death knell for the stock - both Tesla bulls and bears would agree that the stock is the consummate well-manicured growth story. The stock price would certainly collapse at the idea of moderating growth.

Perhaps the Tesla bulls will be correct and the company will become a $100B corporation in the next few decades. The question, however, is whether any of those gains will filter down to the share price and ultimately the pockets of Tesla shareholders. Every share that Tesla issues moves the needle closer and closer to the answer: No.

Disclosure: I am/we are short TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Short Tesla via 2019 LEAP options.

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