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Here's Why Wall Street Doesn’t Think Twice Before Writing Checks to Tesla

Tesla Motors has an impressive ability to raise capital from Wall Street .This piece explores the reasons behind Tesla's ability to raise funds from Wall Street.

by Nikolai Kuznetsov

Tesla Motors Inc. (NASDAQ:TSLA) doesn’t need an introduction on Wall Street. The firm gave us the Tesla Roadster, Model S, Model, X, and now – it is working on a mass market Model 3 with a proposed price tag of $35,000. If Tesla succeeds in bringing the Model 3 to the market, it would have succeeded in transitioning electric vehicles to something within the reach of the average American driver.

The Model 3 is still under production and there are rumors that Tesla might miss its ambitious production deadlines. Tesla CEO Elon Musk is notorious for missing deadlines. However, a bigger problem facing Tesla's plan for the Model 3 is that the firm is practically running out of cash to fund its production. However, fresh news in the market reveals that Tesla has succeeded in raising $1.2B on Wall Street to build the Model 3.



Why does Tesla Motors seem to burn through cash so fast?

Tesla seems to always operate from a position of financial weakness because it is investing heavily in expanding its assembly lines ahead of increased Model S and Model X orders. The firm also needs to expand its assembly line for the mass-market Model 3. In May 2016, Tesla raised some $1.7B as part of efforts to create a cash buffer and mitigate cashflow risks. However, Musk soon had Tesla needing cash again after he announced his plan to acquire SolarCity in an all-stock deal.

Soon after announcing his plan to acquire SolarCity, Wall Street was abuzz with rumors that the firm would need to raise cash again. Elon Musk did a decent job posting a series of tweets to debunk the rumors. However, during the Q3 2016 earnings call, he hinted at the slight possibility of a capital raise in order to "have a larger buffer and to de-risk the business."

Last week, Tesla raised $1.2B from Wall Street in the form of $850M in convertible debt and about $350M in common shares. The firm sold at least 1.3 million shares at $262 per shares. Market reports indicates that the selling price of Tesla's stock initially fell after news broke that the firm wanted to raise money due to fears that it might fall short. However, the stock rebounded to end the week with gains after news broke that the amount raised was above the initial target of $1.15B.

Here's why Wall Street is always ready to write checks for Tesla

Tesla Motors Inc. has only turned a profit two times in history because the firm is still stuck in what many investors would consider a 'growth stage'. Elon Musk won't rest or start consolidating until he has succeeded in transitioning a major part of automobile transportation to run on electricity. Interestingly, Musk's ability to sell his long-term goals to investors is probably the singular factor responsible for Tesla's ability to raise money from Wall Street.

Interestingly, many analysts hold strong bullish sentiments in support of Tesla's long-term plans. Rob Cihra, an analyst with Guggenheim while speaking on CNBC's "Power Lunch" notes that investors should ignore Tesla's near-term headwinds and focus on what the firm can deliver by 2020. In his words, Tesla "is a company that is still just getting going, they are still spending a lot to build the infrastructure to build a lot more cars."

Tesla has rewarded investors who believed it Elon Musk in the days of humble beginnings. From an IPO price of $17 on June 10, 2016, Tesla's stock now trades around $261 per share. The firm, which started as a ragtag team of visionaries intent on building viable electric cars has gone on to cause massive disruption in the global automobile market. Now, Tesla's technology is tested and proven and the firm also has actual cars on the road – it doesn’t take much faith to be bullish on the prospects of the firm.

*This post was published according to the "Contributed Article Terms and Conditions"

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