the Tesla (TSLA) convertible issue

The new TSLA convertible issue came to market yesterday.  Demand was so strong that the company raised an extra $400 million in seven-year notes (yield = 1.25%), bringing the total amount raised, before underwriting fees, to $2.0 billion.  That breaks out into $1.2 billion in seven-year notes + $800 million in five-year (yield = 0.25%).

The conversion premium is a whopping 42.5%!

If the underwriters exercise their overallotment, the total will rise to $2.3 billion.  (The underwriters actually sell more securities to their customers in an offering than the headline amount.  They use this extra to absorb any selling by buyers who intend to “flip,” or sell quickly.  The idea is to stabilize the issue price during the period immediately following the offering.  Sounds weird.  Yes, it’s price manipulation.  Yes, it’s legal.  In this case, the overallotment is $300 million.)

Clearly, no one is in this issue for the interest payments.   It’s all about possible capital gains if the TSLA price can rise by more than 42.5% before the bonds mature.

Tells you something about what bond managers think the prospects for straight bonds are.

At the same time, the issue proceeds take TSLA’s gigafactory–which will ultimately enable the company to sell 500,000 cars, it says–out of the realm of pie in the sky.  Say the company can make $2,000 in profit per car (a number I plucked out of the air).  That would mean that TSLA could be earning $1 billion a year by, say, 2020 – 2021.  At a price of $250, TSLA is currently trading at 30x that figure.  To me, this means two things:  buyers must have a rosier future than this in mind for TSLA, and academics who insisted that at $80 a share TSLA was priced for perfection (>10x earnings at maturity) had no idea what they were talking about.

As a practical matter, anyone who thinks the company will make $5000 per car would at least be content to hold.  Is that possible?  I don’t know.  As I mentioned yesterday, if I hadn’t sold too soon, I’d be selling now.

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