Autos

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Tesla Inc. clearly understands the best appetizers leave you hungry for more.

After months of playing coy about whether or not it would raise more money, Elon Musk's electric-vehicle-cum-renewable-energy company announced late on Wednesday it was seeking up to $1.15 billion in new money, three quarters of it from a convertible bond and the rest from selling new stock. Tesla's shares opened on Thursday up 2.6 percent.

Bit of a head-scratcher, that reaction. But this is Tesla, so the normal concerns about dilution don't necessarily apply.

And this wasn't the biggest shock in the world. For all the innuendo on Tesla's earnings calls, its financials and investment plans made it abundantly clear the company had to raise more money.

Moreover, given Tesla's already stratospheric valuation -- 158 times 2018 earnings, if you're interested -- $1.15 billion equates to less than 3 percent of its market capitalization. And most of it will come in the form of a convertible bond Tesla will hedge in order to limit potential dilution further.

Buy The Rumor, Buy The News
Tesla opened up after announcing a $1.15 billion capital raise. It now trades just 8 percent below its all-time closing high
Source: Bloomberg

Net result: Tesla bulls digest it as a mere billion dollars and shorts scramble to cover their positions. The meal isn't over yet, though.

About a year ago, then-CFO Jason Wheeler said $1 billion of liquidity was "a nice comfort level" for the company. Tesla began this year with about $3.4 billion of cash on its balance sheet and, by my calculation, about $900 million of additional liquidity from various financing lines held by itself and recently-acquired SolarCity. That adds up to nearly $4.3 billion -- way more than comfortable, by Wheeler's definition.

Still, there are quite a lot of calls on that cash. Tesla just made a $150 million acquisition and has about $315 million of debt maturities this year, most of which falls due by the end of June.

Capital expenditure is also accelerating after a slow end to 2016, with Tesla indicating it will invest $2-2.5 billion ahead of launching the Model 3, slated for July. Taken altogether, and using the mid-point on the capex target range, that would take liquidity down to less than $1.6 billion by the end of June -- before adjusting for cash flow from operations. Here's how that number has come in over the past 10 quarters:

Car Cash
Tesla's operations have historically tended to burn rather than generate cash
Source: Bloomberg

Tesla's operations tend to use cash rather than spit it out (for my take on that anomalous third-quarter spike, see this and this). Consensus forecasts for Tesla's free cash flow and capex imply operating cash flow swinging to a positive $1.2 billion this year, including around $470 million in the first half. I respectfully suggest this may be a tad optimistic, partly because of the track record:

Long Revision
Analysts have tended to be overoptimistic about Tesla's free cash flow, forcing cuts to forecasts over time
Source: Bloomberg
Note: Consensus forecasts.

And Tesla's guidance of delivering 47,000 to 50,000 vehicles in the first half of 2017 implies quarterly sales will be essentially flat with the fourth quarter, when the company burned through almost $450 million at the operating level. Plus Tesla has just taken on SolarCity, itself no slouch in the cash-burning department.

Using the cash from operations implied by consensus forecasts, Tesla's liquidity would decline to about $1.9 billion by the middle of the year and, again using consensus forecasts, about $1.5 billion by year-end. On this basis, the $1.15 billion being raised now would keep the company comfortable throughout 2017.

Assume instead that Tesla keeps burning cash at the operating level through at least the first half of the year. If it maintained the fourth quarter's intense pace, all else equal, then liquidity would be just $1.7 billion by the end of June, including the cash being raised now.

That is an extreme assumption regarding the level of cash burn from operations, however. If instead it was just half that level -- a negative $224 million per quarter -- the implication is liquidity would be about $2.1 billion by the end of the June. Again, that figure includes the cash being raised now. If we then assume analysts are at least correct about the second half of the year, with cash from operations swinging back to a positive $354 million per quarter, then the implication is that Tesla would end the year with about $1.74 billion of liquidity (forecast capex still keeps free cash flow negative).

What does all this tell us? First, even using the historically rosy consensus forecasts, Tesla needs the new money it is raising now in order to keep liquidity decidedly in its comfort zone.

Second, cut those forecasts for cash from operations, and even the latest funding injection may still leave the company by year-end with less than half the liquidity it had going into it. The point is, when you're racing this fast, you want to give yourself as much space to maneuver as possible.

Tesla may tap other sources of funding, such as expanding its warehouse or asset-backed lending facilities with banks. Equally, though, as Tesla gears up for a change in its scale, its comfort level isn't likely to stay down at $1 billion. Besides wanting to produce hundreds of thousands more vehicles per year, Tesla's ambitions to build a clutch of gigafactories and carpet the world in superchargers won't come cheap.

Don't be surprised if this appetizer gets upsized to more of an entree by the time it prices. If not, expect another serving in the not-too-distant future.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net