Tesla is raising more capital in a move that is likely intended to smooth the company’s transition into the S&P 500. It’s good news for long-term investors, but might be unfavorable for aggressive traders.
Tesla (ticker: TSLA) announced Tuesday it plans to sell $5 billion in stock. It’s similar to the $5 billion equity raise announced in September. The stock won’t be sold all at once. Instead, Tesla’s brokers will offer stock from time to time. The money helps Tesla grow, and more stock helps index funds out a little. Those funds have tens of millions of shares to buy when Tesla goes into the S&P on Dec. 21.
The idea of another stock offering to smooth the transition in to the S&P has been debated by investors for a couple of weeks. New Street Research analysts Pierre Ferragu told Barron’s another stock sale was a “no brainer” this past week. He rates Tesla stock Buy and has a target of $578 for the share price.
Wedbush analyst Dan Ives called the capital raise a smart strategic move in a Tuesday research report. “Musk and his red cape are raising enough capital to get the balance sheet and capital structure to further firm up,” wrote Ives, adding the capital raise “throws the lingering bear thesis for Tesla out the window for now.”
Bears believe Tesla’s cash generation isn’t strong enough to fund all its growth plans, though the company has been profitable and generating cash for the past few quarters. Ives rates Tesla stock Hold and has a $560 price target for shares.
What is smart for the long term might not be great for the short run. Aggressive traders have bid up shares prior to index inclusion, hoping to sell them at a higher price to index funds. Tesla stock, as of Monday’s closing price, is up almost 60% since the S&P index committee announced plans to put it in the index on Nov. 16.
Tesla stock was slipping in premarket trading, but only a little. Shares are down about $8, or 1.3%, to $631.50.
Shares might give back more of their recent gains as fears of a index-related pricing surge fade with more stock available to trade. Still, only about 8 million shares of Tesla stock will be sold to raise the $5 billion. It helps, but trillions of dollars are indexed to the S&P 500 and tens of billions of dollars worth of Tesla stock will be bought by index fund managers.
Tesla stock, overall, is on an epic run. Shares are up about 855% over the past year. Tesla is now the world’s most valuable car maker by a huge margin. The $200-plus billion in market value added since Nov. 16 is more than the market capitalization of Toyota Motor (TM), the world’s second-most-valuable auto maker.
And analysts are becoming more bullish even as the price rises. About 35% of analysts covering the stock rate shares Buy. A year ago, that ratio was 30%. Still, the average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 58%.
Write to Al Root at allen.root@dowjones.com
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December 08, 2020 at 07:45PM
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Tesla Is Selling More Stock. Aggressive Traders Beware. - Barron's
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