Tesla probably should do another financing

by Chris on August 11, 2014

This week I’m up at the cottage in vacation. Like any good tech investor my leisure reading included the latest Tesla 10Q filing. I know. I should expand my sources of literature 🙂

I’m aware some bears think that Tesla is burning cash and therefore must raise more money through an issue. This view is justified, in part, because the company is actually using a lot of cash and does say in its filing that it may seek more cash if markets are favorable.

I agree on the idea of an issue, but the bears have it backwards.

The way the market works is simple. Great growth companies are rewarded with a lofty multiple ahead of
delivering the growth. If these companies have capital projects to invest in they can safely do so,  knowing the market has already rewarded them with a multiple that allows them to tap into it and raise more cash.

image

My Model S parked at the cottage

Tesla is one such company. They have a ton of projects they can be investing in. Several of them involve hundreds of millions of dollars if not billions, such as the gigafactory. 

For Tesla to accelerate investment (which is what this is not “spending” which implies no return) is smart. The market has identified Tesla as a winner. The result of this is cheap capital which results in more winning investments by the company. 

A lot of amateurs don’t understand this. They see Tesla spending a lot of money which results in the (bad result of) having to raise money.

Wrong. They get to raise money. This is a good thing. They get to because of their track record and growth profile.

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