Tesla's $2 Billion Capital Raise Is a 'Wise Insurance Policy,' Analyst Says

Tesla's equity raise initially came as a surprise to investors, but here's the likely rationale behind the decision.
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Tesla announced Thursday it is raising $2 billion in equity capital, initially putting pressure on the stock, but analysts say the move is smart, reflecting the company's preference to seek a financial cushion while its valuation is high. 

The financing includes founder and CEO Elon Musk purchasing up to $10 million in shares and board member Larry Ellison buying up to $1 million worth. 

Early Thursday morning, the stock fell more than 4%, as investors anticipated dilution to per share value and perhaps wondered why the company is raising money after Musk said just two weeks ago there was no need to do so, and Tesla has proven in recent quarters the ability to turn a profit. By late morning, the stock had reversed course, and was up recently 3.4% to $793.30 a share. 

Tesla didn't provide much detail on the rationale behind the decision, saying in a press release it "intends to use the net proceeds from the offering to further strengthen its balance sheet, as well as for general corporate purposes." 

But the capital raise "is a wise insurance policy," Gene Munster, co-founder of venture capital firm Loup Ventures and former tech analyst at Piper Jaffray, told TheStreet on Thursday. "I was surprised initially because they don't need the cash, but it makes sense because you have to prepare for the worst when you're building something for decades and there is a lot of uncertainty when it comes to delivering on electric vehicles and cash is a critical backbone to that success." 

Some estimate the global market for electric vehicles to reach 20 million cars by 2025 and bulls believe Tesla can take significant market share. Tesla is expected to deliver 506,000 vehicles in 2020, with many analysts projecting more than 1 million by 2025. China could be a key market reflected in those totals and Tesla is aggressively investing in its new Gigafactory in the country. 

Munster noted that Tesla is simply providing itself a cash cushion in case in runs into demand or manufacturing headwinds down the line. Munster estimates Tesla needs roughly $2.5 billion per year for operations and working capital needs, with that amount rising as deliveries rise. Munster said the company is increasing its cushion beyond its operations and working capital needs to roughly $4 billion now.

And now is a good time for Tesla to raise the money, as its valuation has skyrocketed with the company showing the ability to turn profits while also aggressively expanding its market. The stock is up 81% year-to-date.

The move "is a testimony to near-term worth for where the stock is," Munster said. 

Wedbush Securities Dan Ives wrote in a note on Thursday morning that the financing is a "smart and strategic move." He noted that "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."