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Why Tesla Motors Inc (TSLA) Needs Fast Cash for the Second Time This Year

Tesla Motors Inc (NASDAQ:TSLA) is officially in gear for its second round of raising capital for 2016. The company has revealed in a regulatory filing that it expects to ask investors to stake more cash into the business by the end of this year, hinting that the additional capital will help the electric car giant meet the strong demand for its mass-market Model 3.

Diluting stock or debt offering

While Tesla understands the urgency to generate more cash before the end of this year, management has not made up its mind regarding which approach will be best to raise the capital required. However, the company noted it could turn to the option of a debt offering or dilute its stock to amass the cash it needs.

If Tesla chooses to opt for an equity fundraiser, this will mark the second time in the span of a year that the company has diluted its stock. Back in May, the company sold millions of shares and managed to raise about $1.5 billion. Tesla said at the time, the funds were intended to support the production of its low-cost Model 3, the giant’s mass-market endeavor.

The Model 3 will be sold for $35,000 as Tesla tries to steal market share from traditional automakers.

The same narrative

Thanks to the Model 3, Tesla is left in a position to return to the market to raise capital for the second time this year. The company intends to spend the money garnered from its fundraising efforts to set up production lines for the Model 3.

Tesla also indicated spending a portion of the funds to buy equipment that will be used to produce battery cells at its Gigafactory, currently under construction in Reno, Nevada. The $5 billion battery facility is expected to pave the way for Tesla to produce affordable cars, as it will help lower the cost of battery acquisition. Battery remains one of the major cost factors for Tesla and lowering cost on that front should not only enable the company to produce cheaper vehicles, but also bring it closer to the profitability it seeks.

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Tesla is already taking preorders for the affordable Model 3, with bookings having surpassed 350,000 units back in April. Deliveries of Model 3 are expected to begin in mid to late 2017.

SolarCity burden

Additionally, Tesla calls for more funds to support the capital needs arising from its $2.6 billion acquisition of struggling sister company SolarCity.

Convertible notes

Convertible notes stand as yet another reason Tesla is looking for more cash. Senior convertible notes worth about $422 million are set to be redeemed by the end of the current quarter, a major cash hit for Tesla.

Prolonged path to profitability

Tesla booked a net loss of $486 million in 1H2016, increasing 78% from the same period last year. The rapid cash burn is not only weakening Tesla’s liquidity position, which was $3.25 billion at the end of the June quarter, but also prolonging its road to profitability. CEO Elon Musk has already warned that it might take years before Tesla becomes a profitable company.


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