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Tesla Inc.'s (NASDAQ: TSLA) most recent earnings report showed the company was rapidly bleeding money. In fact, the Tesla stock price is down 38% since December 2018 following its reported $702 million loss last quarter.
Despite the negative headlines, Money Morning is still bullish on the electric vehicle market...
In the company's Q1 2019 report, Elon Musk signaled that Tesla needed to raise capital by issuing new debt or equity financing. It's a drastic change in tune from his original exclamations that the company didn't need any more money.
Wall Street analysts say Tesla needs to raise a minimum of $1 billion to $2 billion to match the company's expenses. But some fear that it's too little too late for the firm to cheaply raise capital. Since December's high of $376.79, Tesla's stock has tanked to $235.14. That's its lowest price since January 2017.
Tesla's sinking stock and increased losses are bad news for its bonds as well. Tesla's 5.3% unsecured bonds currently trade for $0.85 each and are due by 2025. This will result in a yield of 8.4% - which is 1% higher than the year before.
But given the company's trajectory, The Wall Street Journal reports that investors think bonds absolutely need to be sold at an interest rate of 9%. If Tesla issues new bonds, the company will have to offer nearly double the interest rate of its last offering to make them attractive to investors.
Otherwise, investors could just go out and buy the original bonds. So, it's ultimately not in Tesla's best interest to issue more bonds moving forward.
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Some analysts still think the company can raise the money it needs, though. Even after its massive stock price drop, its market value is hovering just above $40 billion.
This puts it slightly behind Ford Motor Co.'s (NYSE: F) value of $41.1 billion. Since Tesla is worth $40 billion and that's higher than its debt, it can issue more bonds.
However, Tesla hasn't issued new bonds or stocks since 2017, when it raised $1.8 billion selling off its first unsecured bonds. Since then, the company has shifted its focus to generate profits from its own operations.
In Q4 2018, Tesla saw a GAAP profit of $139 million after roughly $600 million in losses the quarter before. In Q1 2019, its losses increased again to roughly $700 million. This means Tesla lost close to $1.3 billion in less than six months.
But there's a little bit of a silver lining for Tesla's profitability. Back in March, Tesla got a $520 million secured credit line from a variety of Chinese banks to fund its new Shanghai-based factory.
Unfortunately, Tesla has also reported that it has $2.2 billion in cash - a 40% drop from the three months prior. Beyond that, the company is anticipating another loss in Q2 2019. No numbers were provided, but the company says it'll be profitable by the end of Q3 as it ramps up its effort to deliver new vehicles.
There are plenty of pros and cons for Tesla raising funds, though. If the company were to sell new stock, it would water down current shareholders like Elon Musk himself - who owns 20% of Tesla. But new shares wouldn't necessarily increase the firm's debt, either. In fact, some think it would cause a resurgence in Tesla shares if investors were to welcome the cash infusion.
Tesla has always been a crazy volatile company for investors. Because of this, Money Morning cannot recommend buying Tesla stock.
While Tesla stock has tanked over the last several months, the electric vehicle market is still a very lucrative opportunity for retail investors...
About the Author
Daniel Smoot is a Baltimore-based editor who helps everyday investors with stock recommendations and analysis. He regularly writes about initial public offerings, technology, and more. He earned a Bachelor's degree from Towson University.