Tesla Can’t Believe Its Luck!
Elon has struck while the iron is hot, cutting a deal with Mr. Market at his most euphoric. Tesla’s on the cusp of securing a round of funding that buys it the time to become profitable and actually earn its market value!
Carried away by the mob mentality, Tesla is now valued higher than Ford and General Motors combined. That may be justifiable in two more electric decades, but it’s hard to justify such a price today without some extreme financial gymnastics. Aswath Damoradan, the “dean of valuation” at New York University, says Tesla needs Volkswagen-like sales and Apple-like profit margins to be worth anything like $700! Wait, $800!
Of course, Musk wouldn’t have set Tesla up as a for-profit organization if there wasn’t any promise of good economics down the line. The company’s been a money pit so far, but if growing delivery numbers affords it the economies of scale to force down production line costs, fortunes could reverse very quickly.
The company will need to stay funded until that point, so it’s reliant on Elon’s big vision to keep the government and debtors patient. They need to believe in Tesla, and then Tesla needs to monetize that belief.
One of the ways it could do that is by again selling equity to the market, just as it did during its initial public offering (IPO). Bullish investors take receipt of millions more shares, and Tesla gets a one-time hit of funding that reflects the market capitalization investors are currently willing to pay for (not bad at the moment!). Of course, nobody likes giving away ownership of their company, but there’s always a price!
Investors have given Musk the opportunity to cash in on a short-term mania, but it’s at their medium-term loss when the market corrects, adjusting for both the generous growth assumptions and the extra, dilutive shares in float. However, it’s potentially all for investors’ long-term gain if the $2 billion scooped up in funding helps Tesla come of age financially and turn a profit. These are the financial gymnastics we were talking about!
Let’s hope investors don’t expect their money back, at least not for the time being. Tesla has time travelled in terms of its valuation and is accepting this free market gift pending underwriter’s approval. Elon’s smiling, issuing those shares, and cashing that two-billion-dollar check to shore up Tesla’s balance sheet. “Funding secured!”
