Tesla worked hard over the years to become a profitable maker of electric vehicles. Now one analyst thinks it needs more capital, and should issue more stock to help extend its lead over the EV competition.
"If I were advising Tesla (ticker: TSLA), I would recommend an equity issuance of $10 billion to $15 billion as soon as possible," wrote Datatrek cofounder, and former automotive analyst, Nicholas Colas in a Wednesday note.
It's out-of-the-box thinking, as Tesla ended the second quarter with some $23 billion in cash on its books. Free cash flow generated in the first half of the year amounted to about $1.4 billion. Wall Street projects the company will generate another $4.8 billion in the second half.
Tesla didn't always generate that much cash. From 2009 to 2018, Tesla used about $9.2 billion in external capital to build its business. Tesla turned free-cash-flow positive around 2019. From 2019 through the second quarter, Tesla has generated almost $18 billion in free cash flow.
"Tesla's cash balance [has not increased] much over the last six months even though its manufacturing footprint continues to grow," adds Colas. "The company would market this cash raise as a competitive weapon, allowing Tesla to continue to grow its EV presence around the world regardless of economic conditions or competitive developments."
It could help boost valuation, adds the strategist. However, if Tesla raises more than $15 billion, investors might become more worried about dilution from more shares outstanding.
Tesla sold roughly 1.3 million cars in 2022 and is expected to deliver about 1.8 million in 2023, and 2.3 million in 2024. That's substantial growth, but Tesla plans to launch more models to defend its EV turf including the Cybertruck pickup in 2023 and a smaller, lower-priced EV.
It might not need cash to do all that. "Tesla is not capital-constrained, " says Future Fund Active exchange-traded fund $(FFND)$ cofounder Gary Black, adding he forecasts more free-cash-flow generation even with all the needed investments.
He would rather see Tesla take some of its cash and buy back stock to boost shareholder returns. "Some investors get confused and think buybacks compete with internal growth projects. They don't," adds Black.
Bigger tech players buy back stock. Apple $(AAPL)$ spent almost $85 billion on stock repurchases in 2022, according to FactSet. Microsoft $(MSFT)$ spent some $27 billion.
"Telsa is very different from other Big Tech names," Colas tells Barron's. "It plays in a different sandbox."
Tesla sells technology and software but is still a lower-margin hardware vendor in a fragmented auto market. EVs are still early in their cycle of adoption, too. Tesla didn't respond to a request for comment about buybacks or capital raises.
Whether the company will issue or buy back stock is anyone's guess. Still, a company's capital allocation is an interesting topic for investors to consider.
Tesla stock is up 1.43% on Wednesday.
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