Reuters / Kyle Grillot
Shares of Tesla fell as much as 7% in early trading Thursday after the automaker announced that it plans to offer $2 billion of common stock. The shares rebounded after the start of regular trading Thursday, erasing the early loss.
Tesla intends to use the net proceeds from the new offering to “further strengthen its balance sheet, as well as for general corporate purposes,” the company said in a press release. In the offering, CEO Elon Musk will purchase up to $10 million of common stock and Larry Ellison, a Tesla board member and long-time investor, will buy as much as $1 million.
The common stock offering comes just 15 days after Musk said on Tesla’s fourth-quarter earnings call that the company would not raise further capital.
“We’re spending money, I think, efficiently and we’re not artificially limiting our progress. And then despite all that, we are still generating positive cash,” Musk said.
He continued: “So in light of that, it doesn’t make sense to raise money because we expect to generate cash despite this growth level.”
Releasing new common stock can have a negative effect on share price and potentially damage the sentiment of original investors. When a company offers more stock to raise capital, as Tesla has, it means that future earnings per share could take a hit. This is because any earnings brought in by the company have to be spread among a greater number of shares.
In addition, having more common stock dilutes the ownership of investors who held stakes in the company prior to the offering, which might not sit well with Tesla’s original investors.
To convince investors that the additional offering is worth it, Tesla has to have a solid plan for the extra capital and explain how it will generate future earnings for the company and shareholders.
Tesla has been on a torrid rally that’s sent shares up as much as 250% from October 2019, when the company announced a surprise return to profitability in the third quarter, through the stock’s all-time high close on February 4.
Tesla stock has gained roughly 83% year-to-date through Wednesday’s close.