At current valuations, Tesla (NASDAQ: TSLA)can raise additional equity capital cheaply, without really diluting shareholders. Sure Tesla TSLA has already raised about $12 billion via three stock issues over the last year and generated close to $3 billion in free cash flows from its operations over 2020 (total cash holding stood at about $19 billion last quarter), but we think it could still use more cash considering that its growth runway is large and its innovation potential huge. Tesla’s deliveries stood at 500k in 2020, and it expects to grow deliveries at a whopping 50% compounded annual rate going forward – meaning that it could be delivering close to 7x as many vehicles by 2025.
Tesla stock has seen a stellar run. The stock gained about 8x in 2020 alone and has risen by another 20% year-to-date in 2021, driven by multiple factors including surging deliveries despite Covid-19 and the stock’s inclusion into the S&P 500 index. Tesla’s market cap now stands at over $800 billion – more than the next five largest automakers by market cap, combined. Although stock market valuations mean little to the core operations of mega-cap companies, we believe that they are far more consequential in Tesla’s case.
Investors are also counting on Tesla to make fully self-driving cars, launch a fleet of robo taxis, make big improvements to battery tech, and more broadly drive the decarbonization of the auto industry. (related: Just How Far Ahead Is Tesla In The Self-Driving Race?) Tesla has the creative capability and we think it should raise more capital to help it innovate, test, and accelerate.
Now, valuations are a complex mix of technical and macro factors, investor sentiment, and company fundamentals and things can change pretty quickly. For example, if the Federal Reserve gives an indication of interest rate hikes, this could make investors rethink exposure to growth stocks, potentially hurting Tesla’s valuation. The EV market is also going to get more crowded with mainstream players like General Motors GM GM committing to go all-electric in a little over a decade. If these companies are able to deliver compelling EVs, it could diminish the Tesla narrative, hurting its stock.
Considering these risks, it would be opportune for Tesla to scale up its fundraising when the stock has momentum on its side. For perspective, if Tesla were to issue about $30 billion worth of stock over the next few quarters, it would increase its total share count by less than 4% at current stock price levels. Although companies typically see stock prices decline with a secondary offering, Tesla stock could actually rise post such a stock issue, as the cash infusion helps to mitigate risk and gives the company a better chance of justifying its lofty valuation in the long-run.
Tesla stock has outperformed significantly, but what if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.