A week after Elon Musk said on Tesla's (TSLA) Q1 earnings call that there's "some merit" to raising additional capital, the electric car maker has filed to sell $1.35 billion worth of convertible debt due in 2024, along with 2.72 million shares (current value of $650 million). Underwriters will have options to buy an additional 176,405 shares and $202.5 million in convertible debt.
Pricing for the offerings hasn't been set yet. Nonetheless, Tesla's shares, which had fallen nearly 10% since the company posted a Q1 miss on April 24, are up over 3% in Thursday trading, as Wall Street concludes the company is better off raising cash now -- when debt markets are favorable and Tesla still has about a $40 billion market cap -- than kicking the can down the road.
Notably, Tesla is raising capital even though it ended Q1 with $2.2 billion in cash (to go with $11.5 billion in long-term debt and finance leases) and forecast it would be cash-flow positive in each of its last three quarters. One potential reason for doing so: Though Tesla might expect to stay cash-flow positive this year, the same might not hold for 2020, when its Model Y crossover will enter production. Though Tesla promises its Model Y ramp will be more capital-efficient than the ramp for its Model 3 sedan, its capital needs are still likely to be significant given Tesla's expectations that the Model Y will easily be its most popular vehicle once sales commence.
Another potential reason for raising funds: Tesla, whose track record with regards to making good on its guidance is (to put it mildly) quite mixed, is worried that it might not deliver on its 2019 cash-flow guidance. After all, the company had Q1 free cash flow (FCF) of negative $919 million amid a deliveries miss caused largely by a major drop in sales for its Model S sedan and Model X crossover.
Moreover, with Tesla reiterating its full-year deliveries guidance of 360,000 to 400,000 vehicles in spite of the Q1 miss, its cash-flow guidance appears to imply a healthy rebound in Model S and X sales, to go with continued Model 3 strength following the recent start of European and Chinese deliveries.
Just maybe the $2 billion or so that Tesla is raising will end up never needing to be tapped. But given the company's history, its near-term sales pressures and its long-term ambitions, that's hardly a safe bet.