The past six months have been a dream for Tesla Inc TSLA, with the stock generating a more than 262% gain on two consecutive profitable quarters and assurance from the electric vehicle manufacturer that it's ahead of schedule in building its China plant.
Ross Gerber, co-founder and CEO of Gerber Kawasaki Wealth and Investment Management, recently told Benzinga that one of Tesla CEO Elon Musk’s best moves during the historic run may have been the controversial decision to dilute shareholders by selling 2.65 million shares of stock to raise $2 billion in equity.
When stocks experience meteoric rises such as the one Tesla experienced in the past six months on relatively little fundamental news, management often takes advantage of the high share price by selling shares to raise capital.
While these equity offerings reduce the ownership stakes of current shareholders, the ratio of capital raised to shareholder dilution is much smaller at the higher prices. In other words, companies like to strike while the iron is hot.
Yet Tesla’s capital raise came just days after Musk told investors that the company had no plans to do so.
“It doesn't make sense to raise money because we expect to generate cash despite this growth level,” Musk said roughly two weeks prior to the offering.
Tesla's Concession To Wall Street
Some Tesla bulls cheered the decision to raise capital at the $767 level as opportunistic and shrewd given the company’s challenged balance sheet and large debt load. However, Gerber said the capital raise was also a concession by Musk to Wall Street that could pay off much more than investors realize.
“He also paid off Wall Street, which is one of the things he wasn't doing before,” Gerber told Benzinga.
“The secondary side of the raise was done with Goldman, Morgan Stanley, some of the biggest bears on Tesla. Clearly Elon understands the Wall Street game. If [Tesla] gives them $50-$60 million in some of the easiest cash they ever seen...watch the upgrades coming.”
Musk Vs. Tesla Analysts
Tesla is one of the lowest-rated stocks on Wall Street, and Musk has notoriously had an adversarial relationship with stock analysts. He famously dismissed earnings call questions about Tesla’s cash reserves and Model 3 reservations from Bernstein and RBC Capital analysts as “boring,” “not cool” and “bonehead.”
In January, Musk said he doesn’t have to answer analyst questions.
“I do think that a lot of the retail investors ... have better insights than many of the analysts,” Musk said on Tesla’s earnings call.
At the same time, only five of the 31 analysts covering Tesla have Buy ratings for the stock, one of the lowest percentage of any stocks with as much coverage as Tesla has. The average price target of those 31 analysts is $530, about 32% below Tesla’s current level.
Earnings beats and production growth are one thing, but upgrades and price target hikes from major Wall Street analysts can be some of the most bullish catalysts of all for a stock. Given the poor overall coverage of Tesla today on Wall Street, there are certainly plenty of opportunities for upgrades.
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Photo courtesy of Tesla.
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