'A smart move': Here's what 4 Wall Street analysts are saying about Tesla's $2 billion common stock offering
by Carmen Reinicke- On Thursday, Tesla announced plans to raise $US2 billion in capital through a common stock offering.
- The announcement came just two weeks after CEO Elon Musk said the company did not need to raise capital on the fourth-quarter earnings call.
- Here’s what four analysts are saying about the common stock offering and what it means for Tesla.
- Watch Tesla trade live on Markets Insider.
- Read more on Business Insider.
Tesla announced on Thursday plans to raise $US2 billion in funds through a common stock offering.
The announcement from the automaker came just two weeks after CEO Elon Musk said on the company’s fourth-quarter earnings call that it would not raise further capital. Tesla said that the funds will be used to “further strengthen its balance sheet,” according to a press release.
Shares of Tesla initially slipped in early trading Thursday, but regained throughout the day and closed nearly 5% higher. On Friday, shares of the automaker fell in early trading when the company priced the common stock offering at $US767 per share, about 5% lower than Thursday’s close.
While analysts had long expected that Tesla would raise capital at some point, the announcement Thursday caught some off guard because of Musk’s earlier comments.
“We are glad Tesla is in a much better financial spot than in spring 2019,” wrote Morningstar analyst David Whiston in a Thursday note. “But comments like this followed by actions doing the exact opposite are not good for maintaining trust with investors, especially in light of Musk’s infamous 2018 ‘funding secured’ tweet on going private which led to civil fraud charges, Musk stepping down as chairman, and an ongoing U.S. Justice Department criminal probe.”
In addition, Tesla’s 2019 annual report released Thursday showed that the Securities and Exchange Commission subpoenaed the automaker in December, asking for financial information. The report did not specify what data and financial arrangements the SEC inquired about.
Tesla did disclose in the same report that the SEC has closed an earlier investigation into predictions the company had made about production of the Model 3 vehicle.
Here’s what else four analysts had to say about Tesla’s $US2 billion common stock offering.
1. Wedbush: “A smart move by Musk and the board”
Price target: $US710
Rating: Neutral
“This will be a bit of a shock to some given the company talked about no need to raise capital on its recent conference call, although the bulls (which we agree with) will say this essentially rips the band-aid off and takes the doomsday cash crunch scenario some predicted down the road now off the table,” Wedbush analyst Daniel Ives wrote in a Thursday note.
He continued: “In our opinion the size of this offering is larger than many had anticipated, but we believe it’s a smart move by Musk and the Board to take advantage of being back in a position of strength with the Street and focus on raising capital at a time when EV demand is just starting to inflect with China the main fuel in the growth engine.”
2. Baird: “Prudent” but “somewhat surprising”
Price target: $US650
Rating: Neutral
“We think the offering was a prudent decision given current share prices, and puts the company in a strong financial position to further invest in growth,” wrote Baird analyst Ben Kallo in a note Thursday, adding that “in fact we think investors will argue the offering should have been larger.”
He continued: “That said, we do note management indicated on the Q4 call that it ‘doesn’t make sense’ to raise money given upcoming cash generation, so the announcement was somewhat surprising.”
“Importantly, we think the offering provides an opportunity for sell-side analysts to upgrade from sell ratings, potentially serving as a positive catalyst.”
3. Morningstar: We’d “rather Tesla raise at least $US5 billion”
Price target/ fair value: $US326
Rating: N/A, very high uncertainty
“We have long wanted Tesla to raise a large amount of cash via stock issuance due to its lofty valuation and then perhaps never need to raise capital again. We’d prefer that to annual capital raises as the company has done via convertible debt or equity,” analyst David Whiston wrote in a Thursday note.
He continued: “We’d like to see more consistency between the company’s actions and the words of CEO Elon Musk. This is at least the second time Musk has said on an earnings call that raising capital is not happening and then shortly thereafter Tesla raises capital.”
“Musk also said Tesla had no acquisition targets so it is possible that has abruptly changed, but we think he wants to capitalise on the stock’s recent upward explosion and we can’t blame him. We’d just rather Tesla raise at least $US5 billion so as to perhaps never raise capital again.”
4. CFRA: “Not surprised by the capital raise”
Price target: $US440
Rating: Sell
“We are not surprised by the capital raise considering co.’s ambitious growth plans, including a new factory in Germany and possible factory in Texas, in light of the stock’s run-up and the fact it issued equity last May at $US243/share,” CFRA analyst Garrett Nelson wrote in a Thursday note.
He continued: “We will update our estimates for the EPS dilution post-closing, but continue to view the stock’s current risk/reward as unfavourable.”