On Thursday, February 13th, Tesla (NASDAQ: TSLA) announced they would be offering $2 billion worth of common stock. Selling around 2.65 million shares directly to investors at $767 a pop allows Tesla to raise capital without accruing more debt to its already heavily-laden balance sheet, but it also dilutes the ownership of each shareholder. Investors typically dislike these types of stock offerings, because by adding more available shares, it has made every existing share worth a slightly smaller stake than before. What may be even more frustrating for investors is that the announcement comes just two weeks after CEO Elon Musk said “it doesn’t make sense to raise money” in Tesla’s Q4 earnings call.
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As well as the stock offering, Tesla also disclosed news of a Securities and Exchange Commission investigation into the company’s financials. The SEC will be looking into the company’s $2.6 billion SolarCity acquisition in 2016. CEO Elon Musk is expected to stand trial in Delaware’s Chancery Court in March to defend the acquisition of the solar panel maker, of which Musk was Chairman and was founded by his cousins.
The plans for the offering and news of the investigation sent the stock falling pre-market, but once the markets opened, something funny happened: Tesla stock went up.
Why did Tesla stock go up?
Tesla stock surged to over $800 on Thursday, up about 8% for the day. The stock traded fairly level on Friday and is now hovering around the $800 mark, showing no ill-effects from announcing a dilution of its shareholder’s value and an SEC investigation into the company.
So, how does this happen? Has Tesla figured out a secret recipe that takes bad news and turns it into gains? Not exactly, but what it does have is some of the most ardent followers a stock has ever gathered. The recent performance of Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Facebook (NASDAQ: FB), and Google (NASDAQ: GOOG)(NASDAQ: GOOGL) in spite of the long list of investigations and anti-trust trouble they face shows the lack of importance investors place on such legal drama. It is not surprising for investors in the electric car manufacturer to do the same. What is surprising is the speed at which they have turned the stock offering into a positive.
All eyes go to the potential a cash boost could bestow on the company, glazing over issues such as the fact that the announcement directly contradicts Musk’s comments from just two weeks previous, investors’ stakes have been diminished, or that the asking price of $767 is going to come in at about a 4% discount on the current stock price.
Will this stock offering backfire?
In announcing a stock offering at the current levels, are the Tesla board trying to cash in on its own stock’s overvaluation? And in doing so is it taking advantage of the cult-like followers which it has amassed over its time as a public company?
Musk & Co. may benefit in the short term from the $2 billion cash influx, but if the stock underperforms once they have filled their coffers, this manipulation of its shareholders could sour the sentiment towards the company down the line.
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Financial Analyst at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.