Just a few days ago the Tesla share price was surging towards $1000 a share as shorters scrambled to buy back stock with many registering huge losses. The shares have since settled down at around $750-$800 but today the company announced a $2 billion fundraising. The shares increased by around 5% on the back of this announcement although some are critical of the company’s management. Why?
Back in June 2019 the Tesla share price dipped under $200 and many were gambling that the company would go bust. Haemorrhaging cash, unable to sustain profitability and harbouring a chief executive who was never out of the news, it didn’t look good. However, it is not just shorters closing their positions which pushed the share price to approaching $1000. There has been a fundamental change in the way in which investors are viewing the company and the prospects for the future.
What changed over the last two weeks?
On 29 January 2020 Elon Musk was involved in a call with analysts in which he suggested it “wouldn’t make sense” to raise more cash. Fast forward two weeks, and the company has announced a $2 billion fundraising even though the company ended 2020 with $6.3 billion in the bank. So what has changed?
It is ironic, when it comes to stock market investments it is near impossible to raise funds when you actually need them. So, why not raise additional funds on the current heady valuation to speed up expansion and long-term profitability? In many ways investors have themselves to blame for the fundraising because they have pushed the share price to levels which are potentially unsustainable in the short term. Can you really blame Tesla for taking advantage of this appetite for stock at the moment?
Putting his money where his mouth is
While Elon Musk has a multi-billion dollar investment in Tesla he is still putting an additional $10 million into the fundraising. Other board members are also following suit which would suggest that they are “comfortable” with the share price at the current level. If not, why would they announce plans to invest their own money at the current level?
There is no doubt that Elon Musk has an ego, he can be arrogant and is probably difficult to work with. There is also no doubt that the majority of businesses that he touches do turn to gold. This is a man whose first real venture was PayPal which made him a multimillionaire. At a relatively young age many people would have retired to enjoy their new-found wealth but he decided to push on. Many people will not be aware that he had not planned to be actively involved in Tesla but when the other founders disappeared he effectively fell into the role.
Forecasts for the future
It is extremely difficult to forecast short to medium term profitability for Tesla with any real confidence. However, there is no doubt that analyst have found a new liking for the company with one suggesting the shares could hit more than $6000 over the next few years. They might be correct, they might be well short of the mark, but who would have thought from last June to today the share price would have more than quadrupled?