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Tesla Could Raise More Capital Before S&P500 Inclusion

New Audi boss Markus Duesmann is assembling a team of about 200 engineers within parent company Volkswagen Group to develop a new computer-driven vehicle system, he told Reuters. This is enough reason why you should stop listening to any Wall Street analysts that valuates Tesla as a car company. Markus gets it, wall street don’t.

Tesla is now super ready for s&p500 inclusion, after posting second-quarter profit last week, which makes it the fourth consecutive profitable quarter.

Amid a global pandemic and a market crash, which in return has crippled other carmakers’ ability to be profitable, Tesla posted a profitable quarter and according to the CEO Elon Musk, demand is never a problem, while other carmakers are begging the gods for demand to rise in the second half of the year. Am I communicating?.

Elon Musk’s idea of selling Tesla Short Shorts (which sold out within hours) before the Q2 date was enough to suggest Tesla short-sellers were about to get liquidated.

The question now is, will Tesla use this amazing opportunity to raise more capital, to easy market liquidity, to have about 25 million shares to sell to the incoming hungry institutional funds?. In my opinion, the answer is Yes!.

Gary Black (CIO Equities Goldman Sachs Asset Mgmt) explains it better bellow:

1/ There’s still a lot of questions about a capital raise, so I will try to explain it here again. There won’t be a capital raise unless S&P asks, Tesla to do it to ease the liquidity of indexers trying to buy 25M shares over 5 days once S&P announces it is adding Tesla to the S&P500.

2/ There’s $4.6T of S&P 500 index money who will need 80bp (float adj 147Mx$1,500/$27.6T=80bp), or a total of 25M shares ($4.6T x 80bp/$1,500). If TSLA does a $5-$10B secondary after S&P announces, Tesla can sell 3-7M shares to these indexers who need 25M.  Tesla still pops 10-15%.

3/ Even though Tesla doesn’t need the cash (Tesla has $8.6B in the bank and will generate $1B FCF after CapEx in 2H), this could be a unique opportunity to put the screws to competitors reeling from the recession. Finally, Tesla can eliminate its net debt (now $5.5B), paving the way...

4/ for an inv grade credit rating in 2021. S&P inclusion (w/indexers holding shares forever), combined with an inv grade rating would reduce Tesla beta (now 1.5x) and cost of equity (now 10%) to 8-9%. The PV of cash flows would rise 10-15%, implying a 10-15% higher stock price.

Gary Black

If Tesla indeed raises more capital and get included in the s&p500, this will put Tesla Inc! six-plus years ahead of competitions, and finally set the stock price of $1500 as a strong bottom.

According to Cathie Wood of Ark Invest, ARK believes Tesla has strategic & tactical reasons to launch a ride-hailing service with human drivers before its robotaxi network launches next year. If successful, which we believe will be the case, a Tesla ride-hailing service will lower the probability of our bear case substantially during the next five years, bolstering our base case at ~$7,000. We are encouraged that few analysts are modeling this possibility!

“Tesla Might Be ‘Mind-Boggling Cheap’ at $1,500” was the title of an article shared by Barrons yesterday after Morgan Stanley analyst Adam Jonas raised his bull case estimate for Tesla stock to $2,500 a share.

Feel free to bet against Tesla, but I believe it’s very dangerous to bet against Elon Musk.

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