Elon Musk may need to tap capital markets for more than $10 billion by 2020 to fund Tesla Inc.’s auto-making operations, new products and expected expansion into China, according to Goldman Sachs Group Inc.
While Tesla has options to issue new bonds, convertible notes or equity, each choice would have downsides for investors, Goldman analyst David Tamberrino said in a research note on May 17.
“We see several options available to the company to refinance maturing debt and raise incremental funds, which should allow Tesla to fund its growth targets,” Tamberrino wrote. “However, issuing incremental debt (including priming current creditors with secured debt) may weigh on the credit profile of the company while issuing additional equity or convertibles at lower premiums would dilute current shareholders.”
A Tesla spokesman declined to comment.
Musk, who co-founded the electric-car maker and serves as chairman and CEO, is cutting costs to avoid raising capital this year. He insists he won’t have to and cut off analysts who asked probing questions on a conference call this month.
The company has struggled to meet production targets with what was intended to be its first mass-produced vehicle, the Model 3, and burned through more than $1 billion in the first quarter.
Goldman joins a growing chorus of investors and analysts who see additional financing as not only wise, but vital. Moody’s Investors Service, which downgraded Tesla’s credit rating further into junk in March, expects Tesla will need to raise about $2 billion to offset cash burn this year and account for debt maturities through early 2019. CreditSights has a similar expectation, though that could be less if the company follows through on its production targets or borrows through its bank credit line.
“Tesla’s view that it doesn’t require a debt or equity raise this year is mathematically correct, but highly imprudent from a credit and risk perspective if followed,” Bloomberg Intelligence analyst Joel Levington said in a report last month.
Musk said in July 2016 that Tesla’s ambitions could cost tens of billions of dollars. He added that he didn’t plan on spending billions more right away after a tour of the company’s battery factory in Nevada, which was under construction at the time.
The company set up a unit in China this month, taking a step closer to producing electric vehicles and batteries in the country for the first time.
The shares gained 0.6 percent to $288.07 as of 11:25 a.m. on May 17 in New York, and are down about 7.4% this year, giving the Palo Alto, Calif.-based company a market value of nearly $49 billion. Its 5.3% bonds due 2025 were last quoted at 87.25 cents on the dollar, according to Trace bond-price data.
Goldman’s Tamberrino recommends selling Tesla shares, and sees them slumping 32% to $195 over the next six months. The stock has 10 buy ratings, 11 holds and 9 sells, according to data compiled by Bloomberg.
By Anthony Palazzo and Molly Smith