Tesla's Strategic Move: Issuing More Stock to Stay Ahead in the EV Game

Tesla, the renowned maker of electric vehicles, has established its position as a profitable force in the industry through years of dedicated effort. However, a recent analysis suggests that the company should consider bolstering its capital and issuing more stock to maintain its lead over the competition in the electric vehicle (EV) market.

In a thought-provoking note, Nicholas Colas, co-founder of Datatrek and a former automotive analyst, recommends that Tesla undertake an equity issuance of $10 billion to $15 billion expeditiously. While this proposal may seem unorthodox given Tesla's substantial cash reserve of approximately $23 billion at the end of the second quarter, it signifies a strategic move to solidify their market dominance.

Although Tesla has made significant financial progress, accumulating around $1.4 billion in free cash flow during the first half of this year and with projected figures exceeding $4.8 billion for the second half according to Wall Street estimates, the company wasn't always in such a favorable position. From 2009 to 2018, Tesla relied on external capital amounting to approximately $9.2 billion to establish its thriving business. However, since 2019, they have managed to generate nearly $18 billion in free cash flow, marking a significant turning point.

Despite its growing manufacturing footprint, Tesla's cash balance has remained relatively stagnant over the past six months, prompting Colas to suggest that raising additional capital would be an astute move. Not only would this infusion of funds serve as a competitive advantage for Tesla, allowing them to expand their EV presence globally regardless of economic conditions or competitive developments, but it could also contribute to bolstering the company's valuation.

However, it is crucial for Tesla to strike a balance when raising capital. While an influx of funds in the range of $10 billion to $15 billion seems reasonable, exceeding this threshold could raise concerns among investors regarding dilution due to an increase in outstanding shares.

Ultimately, by making the strategic decision to issue additional stock, Tesla aims to sustain its position at the forefront of the EV industry, driving innovation and maintaining a competitive edge in the global market.

Tesla's Impressive Growth

Tesla had an impressive year in 2022, selling approximately 1.3 million cars. The company's sales are projected to reach around 1.8 million in 2023 and 2.3 million in 2024. Despite this substantial growth, Tesla has plans to further establish its dominance in the electric vehicle (EV) market. The upcoming launches of the Cybertruck pickup in 2023 and a smaller, more affordable EV are just a few of these ambitious moves.

Interestingly, Tesla's expansion does not seem to be constrained by capital limitations. According to Gary Black, the co-founder of Future Fund Active exchange-traded fund (FFND), Tesla is "not capital-constrained." He even predicts that the company will generate more free cash flow while making necessary investments.

Rather than using its cash solely for expansion, Black suggests that Tesla consider buying back stock to enhance shareholder returns. This strategy, he emphasizes, is not at odds with internal growth projects. In fact, many major tech players, including Apple and Microsoft, have successfully utilized stock buybacks as a means to benefit their shareholders.

However, Tesla is not comparable to other behemoths in the tech industry. As Colas points out, "Tesla plays in a different sandbox." Although Tesla sells technology and software, it remains a hardware vendor with lower profit margins, operating in a highly competitive auto market. Furthermore, the adoption of EVs is still in its early stages. Unfortunately, Tesla has not provided any comments regarding potential buybacks or capital raises.

Investors are left wondering about the company's future decisions regarding stock issuance or buybacks. Nevertheless, the topic of capital allocation is undeniably intriguing for those interested in Tesla's future prospects.

As of Wednesday trading, Tesla's stock has risen by 1.8% to $272.23. Meanwhile, the S&P 500 and Nasdaq Composite have experienced gains of 0.4% and 0.6%, respectively.