Tesla Diluting Equity Is Very Likely

Tesla (TSLA) shared its Q1 quarterly report earlier this week. Tesla beat the analysts’ estimates on earnings whereas its revenue was in-line with the consensus. Tesla posted loss of -$0.57 per share, beating the consensus target by a penny while its revenue of $1.6 billion signified a year-over-year jump of over 45%.

Due to the good results, Tesla’s shares soared in after-hours trading, but soon reversed course as Tesla’s management made some very unrealistic promises. Many of Tesla’s important executives had departed the company just a few days before the earnings report, which, in my opinion, is a big red flag.
Despite the departure, in a shareholder letter, Tesla promised to deliver 500,000 units by 2018. Tesla was expected to produce 500,000 units by 2020 and despite the production woes of the past, Tesla has promised to deliver on the target two years sooner than expected.

The company also promised to deliver a million units by 2020. Tesla is already burning through a lot of cash at a very rapid rate and in order to deliver on its promises, it will need a lot more cash. Due to growing capex, Tesla will be cash flow negative for a long time and it may even issue more shares to fund its growth.

I strongly believe that Tesla will cash in on its overvaluation by diluting shares to fund growth. I would advise Tesla longs to be cautious going forward. Investors should expect Tesla to issue 5%-10% equity in the coming months.

Model 3 may cannibalize sales

The Model 3 is a great product and is roughly 50% cheaper than the Model S. Although the Model 3 is yet to hit the market, it may compel many potential Model S buyers to wait for the Model 3 instead. The Model 3 may cannibalize Tesla’s sales and given that it is yet to hit the market it is highly likely that it will have a negative impact on Tesla’s sales.

Also, Tesla’s margins are already negative and given that the Model 3 is cheaper, I don’t think the EV-maker can make money on it in the short-term.


Tesla’s earnings may have been better than the analysts’ estimates, but the company is still burning through cash and will likely dilute equity to fund growth. Tesla longs should be cautious going forward. The launch of Model 3 may also cause short-term troubles. Thus, I think investors should stay away from Tesla for the time being.
Published on May 9, 2016
By Prudent Investor

Copyrighted 2020. Content published with author's permission.

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