Tesla needs more money. A lot of it.
After a surprisingly weak first quarter in which it burned through nearly $1 billion, the company said Thursday that it would seek to raise about $2 billion in the markets.
The electric-car maker plans to offer investors 2.72 million shares of stock, which would raise about $650 million, and $1.35 billion of debt securities that can convert to stock at a later date, according to a regulatory filing. The plan could raise as much as $2.3 billion if demand is great enough for the banks underwriting it to sell additional stock and bonds.
Wall Street analysts, noting Tesla’s haphazard progress, had long expected the company to return to the public markets for fresh capital.
“It was kind of inevitable,” said Vicki Bryan, chief executive of the research firm Bond Angle. “It was overdue.”
Selling new shares often depresses a company’s stock price, but Tesla’s stock was up more than 3 percent in afternoon trading Thursday, a sign that some investors still believe the company can achieve its ambitious goals, and are willing to finance those dreams.
“This is pretty important for Tesla,” said Ross Gerber, the chief executive of Gerber Kawasaki Wealth and Investment Management, who owns Tesla shares. “We’re very excited because they are able to raise the capital at a very low cost.” Tesla shares trade at a high valuation. As a result, the company is effectively paying little when it issues new shares.
Tesla said its chief executive, Elon Musk, would spend $10 million buying new shares.
A U-turn for Musk
Mr. Musk had said for months that Tesla did not need to raise new capital. Then, when discussing the company’s first-quarter results last week, he said there was “merit to the idea of raising capital at this point.”
But it probably would have made more financial sense when Tesla’s stock price was a lot higher. With the stock down by more than a third from its 2018 peak, Tesla must sell more shares to raise the same amount of money. When new stock is sold, existing shareholders end up with a smaller stake in the company if they do not take part in the new offering.
The plan to raise money also underscored Tesla’s reliance on the good graces of public-market investors. Mr. Musk indicated last year that he wanted to take Tesla private. Discussions with investors set off a series of events that led to Mr. Musk’s saying on Twitter he had secured funding to do just that. The Securities and Exchange Commission said his declaration was misleading, and Mr. Musk later reached a settlement with the regulator that forced him to step down as the company’s chairman.
Why Tesla needs new money now
If Tesla raises $2 billion, it can use the money as a buffer in case its operations continue to stumble and consume large amounts of cash this year.
In recent months, Tesla has not sold enough cars to cover its operating expenses. Sales of its main product, the Model 3 sedan, tumbled in the first quarter. As a result, the company’s operations used $640 million in cash in the period. In addition, Tesla reported $280 million in capital spending.
The company also paid off a convertible bond in the quarter, using up $920 million of cash. At the end of March, Tesla had $2.2 billion in cash on hand, down from $3.7 billion at end of 2018.
Jeffrey Osborne, an analyst at Cowen & Company, said he expected Tesla’s operations to churn out $835 million in cash this year, but he also predicted that plant and equipment needs would use up $2.4 billion of cash.
More challenges ahead
Tesla is expecting Model 3 sales to pick up as it irons out logistical problems that it says have hampered deliveries in Europe and Asia.
It is not clear whether demand for the Model 3 is softening in the United States. Sales were particularly strong last year but some of them may have been motivated by the reduction of an electric-car tax credit on Jan. 1. The credit will be reduced again on July 1 and will disappear after this year. And sales of Tesla’s older, more expensive models have recently plummeted, and these generally have fatter profit margins.
But sales are not the only thing that affects Tesla’s cash. The company has plans for new models that include a large truck, the Semi, and a sport utility vehicle, the Model Y. Tesla is also developing facilities in China. And it is thinking about selling its own insurance, which could also require significant amounts of capital.
Will $2 billion be enough?
Analysts think the plan announced Thursday will probably be adequate to finance the production of Tesla’s current models, but they say the company may be back for more cash as it moves to release new vehicles.
Because of production problems, Tesla products have in the past come out long after the company initially said they would. If such delays recur, Tesla’s cash would be depleted and its more efficient rivals would have more time to eat into its market share with their products.
For most of its existence, Tesla has failed to show consistent profits. During the past 10 years, it has posted a profit in only four quarters.
“Tesla is not sustainably profitable or cash-flow positive,” said Ms. Bryan, the analyst, “so this seems like putting a finger in the dike.”