Markets

Tesla to sell up to $5 billion in stock amid its incredible rally

Key Points
  • Amid Tesla's record rise that has seen shares soar to new highs, the company said it will sell up to $5 billion in stock.
  • The additional shares will be sold "from time to time" and "at-the-market" prices, Tesla said in an SEC filing.
  • It said banks will sell shares based on directives from Tesla.
  • Through Monday's close, the electric car maker has gained nearly 500% in 2020.
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Tesla to raise up to $5 billion in share offering

Amid Tesla's incredible rise that has seen shares soar to new highs, the electric auto maker said Tuesday it will sell up to $5 billion in new stock.

The additional shares will be sold "from time to time" and "at-the-market" prices, Tesla said in a filing with the Securities and Exchange Commission. It said banks will sell shares based on directives from Tesla.

"We intend to use the net proceeds, if any, from this offering to further strengthen our balance sheet, as well as for general corporate purposes," Tesla said. 

The stock briefly traded in the green on Tuesday, but moved lower throughout afternoon trading and ended the session 4.67% lower.

The decline hardly dents shares' rapid appreciation this year. Through Monday's close, the electric car maker has gained nearly 500% in 2020. In the last year, shares have gained 1,004% compared with the S&P 500's 20% rise.

Tesla's run-up has only gained steam since the company announced its 5-for-1 stock split on Aug. 11. In that time, Tesla shares have rallied 81.3%. That gain includes a 12.6% pop on Monday, when the split took effect. That rise came even though stock splits are purely cosmetic, meaning nothing about the company's underlying business changes.

Tesla's market cap now stands around $464 billion meaning the new offering represents about 1% of the company's value, according to FactSet.

Wedbush analyst Dan Ives called the capital raise a "smart move," citing strong appetite among investors to "play the transformational EV trend through pure play Tesla over the coming years."

CEO Elon Musk is "raising enough capital to get the balance sheet and capital structure to further firm up its growing cash position and slowly get out of its debt situation, which throws the lingering bear thesis for Tesla out the window for now," Ives added. Wedbush has a neutral rating on the stock and a base target of $380.

Part of Tesla's share appreciation is due to the company reporting its fourth straight quarter of profits in its July 22 report, which qualifies the electric auto maker for inclusion in the S&P 500. Tesla also posted better-than-expected second-quarter vehicle deliveries.

Still, the rate at which investors have piled into the company has left many on the Street puzzled.

Miller Tabak chief market strategist Matt Maley warned that shares are due for a pullback. Those "who buy stock in TSLA on the new $5bn equity distribution they announced this morning are going to get burned," he said.

"Even if this stock rallies a bit more over the next week or two, it's going to be trading at least 30% below today's level before the end of the year in our opinion," he added. 

On Monday night, RBC reiterated its underperform rating on the stock, calling the automaker "fundamentally overvalued." However, the firm did raise its price target from $170 to $290.

Tesla last tapped capital markets in February, when it announced a $2 billion common stock offering. The announcement came just two weeks after Musk said during the company's fourth quarter earnings call that he had no intention of raising capital.

"We're spending money as quickly as we can spend it sensibly," Musk said on Jan. 29. "We are not artificially limiting our progress. Despite all that, we are still generating positive cash. In light of that, it doesn't make sense to raise money because we expect to generate cash despite this growth level."

- CNBC's Fred Imbert contributed reporting.

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