Tesla has done the impossible by receiving more than 325,000 reservations for the Model 3 in just one quarter, becoming the biggest consumer product launch in history. Delivering on all that product, however, is a different story. Tesla is looking to move from building 50,000 cars to 500,000 cars by 2018 – an unprecedented ramp-up in auto history. To do it, the company needs billions of dollars.
New reports suggest Tesla Motors will raise billions of dollars for production costs by selling its stock. Although this runs the risk of serious stock price dilution, the founder and CEO Elon Musk believes the benefits may outweigh the risks.
Tesla’s latest money crunch came as a result of Musk moving the timeline to deliver on the Model 3 and other vehicles from 2020 to 2018. Shaving two full years off production targets will require an increase in capital spending of about 50 percent, which amounts of around $750 million from the original budget for this year.
These developments are not totally unexpected, since Tesla faces huge expenditures in order to increase production at its enormous new factor in Las Vegas. In addition to selling more of the Model S and Model X, the company must deliver the Model 3 and add more sub-models to its fleet. It also intends to install more superchargers, greatly expand its sales and service centers around the world, and hire more manufacturing experts.
Barclays analyst Brian Johnson’s projections have Tesla doing a $3 billion equity raise in the second quarter. Given the company’s current stock prices, a transaction that big would be the equivalent of around 14.5 million shares, which is an increase of 11 percent to the amount of shares outstanding.
Johnson declared Tesla was a “startup unicorn” because of its ambitious lans. “With its ambitious plans that will require an incremental fundraising, we view Tesla as more of a cash-hungry startup unicorn than a traditional public company,” he wrote in a research note. “With Tesla likely to come to the market for a capital raise near-term, it’s worth asking whether it deserves an up round or a down round.”
If Tesla moves forward, it would be Tesla’s sixth capital raise in the last four years. Musk is a frequent participant in the many capital raises and he remains the largest stockholder, with 22 percent of all stock. Although Tesla raised capital from the pre-orders for the Model 3, Musk wisely backed away from over-reliance on pre-orders as a source of investment.
“I don’t think we want to rely too much on customer reservation money as a source of capital,” he said during the first-quarter earnings call with analysts. “Maybe there is a buffer or something, but it’s not as a primary source of capital. I think it’s going to make sense for us to raise some amount of money — some combination of equity and debt — and make sure the company has a good buffer of cash on hand. I think it’s important for de-risking the company.”
Tesla has faced liquidity crises before and managed to come out ahead. Although long-term debt rose to $3.12 billion from $2.65 billion last year, the company also drew from a line of credit and paid all but a few dollars of it back. Tesla has about $1.44 billion in cash and cash equivalents as of March 31.