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Great except for the part where current shareholders' stakes are diluted.

by cremnob 13y ago

DaniFong 13y ago
There is no scenario under which that wouldn't happen eventually. Tesla needs cash to fuel its next vehicle programs and growth. If it didn't get it, the growth story Shareholders should be glad, as I am, that they were able to raise at the price they did. They shown they can convert cash into value. They need to do it.
jamesaguilar 13y ago
The article doesn't say anything about that. I could be wrong, but I'm surprised if you can legally dilute a public stock.
- tanzam75 13y ago
  The article does not have to say it. When a company does a secondary offering, that is a dilution, by definition. Dilution by secondary offering does not require shareholder approval, up to a threshold. On the NASDAQ, the threshold is 20%. A company could, if it felt like it, dilute by 20% every single year for twenty years, and leave the original shareholders with 4% of the company. The theory is that because the secondary offering will take place at fair market value, the cash raised will adequately compensate the existing shareholders for the dilution.
  - jamesaguilar 13y ago
    Ah, I see, that makes sense. I don't know what I was thinking. Of course selling stock is dilution, it's not like the company has extra stock it is holding in itself.
  - calhoun137 13y ago
    After reading through all the comments in the dilution thread I think I finally understand: The value of a stock is determined by what people are willing to pay for it on the market, and if a company simply issues more stock, its entirely possible that the price of the stock will go up, go down, or stay the same. This is of course only true for public companies, and in the case of private companies dilution is a completely different issue.
- adventured 13y ago
  Lots of companies routinely dilute as a form of raising capital (to take advantage of a high valuation, or frequently out of desperation). This is one of the most common forms of funding for young (or weak), publicly traded biotech and pharma companies. It was very frequently done during the dotcom bubble days.
- damoncali 13y ago
  If you create more stock, you dilute the ownership of current holders. It's inherent in the concept of an offering, and very much legal.
kaib 13y ago
Can you expand on this a bit. Dilution itself is usually not a problem when fundraising, the expectation is that the new funds will increase the Net Present Value of the company more than the dilution. Are you saying this is not true or is there some functional reason why dilution is bad in this particular case?
- damoncali 13y ago
  Dilution is always bad. It means you own less of the company. It's necessary in order to finance a company like Tesla, but bad nonetheless. But the price of Tesla is not based on such things like cash flow and future profits. So I'm not sure it is bad - for now.
  - marvin 13y ago
    The alternative to dilution is not having capital for expansion and getting crushed by competitors that do. So I dispute that dilution is in itself bad.
    - damoncali 13y ago
      Hence the "necessary to finance a company like Tesla".
  - kaib 13y ago
    Owning less of a much larger pie does seems sensible from a monetary standpoint. It seems like you are optimizing for percentage ownership of the company instead of actual value of your stake?
    - damoncali 13y ago
      You are mixing up your definitions. Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted. Financing a company may create dilution and still put the shareholder in a better spot ultimately. For Tesla, a high-growth capital-intensive business, you can bet on the dilution part happening (they have to get the money from somewhere). The better off part is still an open question.
SatvikBeri 13y ago
This is generally not considered an issue. When you take investment, your %age ownership of the company goes down but the market cap increases according to the dollar amount you raised (or more, if investors are optimistic about your ability to use the cash.) So the value of your equity stays the same or increases.
- adventured 13y ago
  That's not true at all. The market cap does not inherently increase according to the dollar amount you raised. Cash on a balance sheet almost never gets a one to one value in a public corporation. In fact quite the opposite, it almost always gets a significant discount. If you need a great example of this, take a look at how the market valued Apple's cash vs market cap as their cash exploded to the moon rapidly while their market cap imploded (or Microsoft's similar demonstration a decade prior). Berkshire Hathaway has also regularly demonstrated this principle in action over the last 20 years. Cisco has been demonstrating it for a decade as well. None of these companies have seen their market valuations well supported or increased by huge cash positions, their cash is and was always heavily discounted (in the case of MSFT and AAPL it's not viewed as particularly valuable because it can't or won't likely be used to fuel growth, but rather discharged gradually as a modest dividend, or left to rot on the balance sheet earning very little; in the case of Berkshire, the market would rather see Buffett doing acquisitions or holding equities to boost the return (both of which he prefers to cash)). There are a lot of companies that are publicly traded, where if you calculated their cash as part of their market valuation, they'd be trading at extremely low discounts (eg AAPL at 6 times earnings). The market is simply telling you in those cases that it does not believe their cash is very valuable.
  - SatvikBeri 13y ago
    The market cap does not inherently increase according to the dollar amount you raised. Good point. It all comes down to the (perceived) return on investment that a company can get using its cash. In cases where companies are selling stock to raise cash it's usually perceived that the company will be able to get a decent ROI. So in most cases where a company raises cash (through funding or sale of stock) their market value will stay constant or increase. This is Tesla's situation. In contrast Apple/Google/Cisco have shown very little ability to get a high return on investment on any additional cash, because they already have so much. This ROI is perceived by investors to be lower than what the investors could get on their own, which is why the cash is discounted.
revelation 13y ago
The stock has risen from 85 to 91 on the news and is now holding there for a few days already. You may have been diluted on percentages, but the money value of your stock has increased far more. Also note that a large part of this money was raised in convertible debt, where shares won't show up in the float for many years (certainly in Tesla-time-periods).
damoncali 13y ago
The dilution is peanuts compared to the premium they paid in the first place for Elon Musk's reality distortion field. edit: to further explain what I have apparently not (judging by the speed with which I got the first downvote), what I am saying is that Tesla trades at a massive premium to any normal way of valuing a public company - far more than the dilution of another offering. Clearly, the people investing in Tesla are not worried about dilution, and are betting on the Big Plan and the ability of Elon Musk to create something absolutely freaking massive. Either that, or they're just not doing the math. But I'd bet on the former.
- jnw2 13y ago
  Tesla strikes me as having a lot more growth potential than any other publicly traded company I'm aware of, if things go well for Tesla. I certainly think its value is based upon future earnings potential, and not current revenue.
  - jnw2 13y ago
    On the other hand, if Tesla continues to raise funds every six months in a manner similar to the recent secondary offering, buying and holding the stock for a long time will probably not turn out to be the fantastic deal for shareholders that it has a good chance of being if Tesla chooses to bootstrap from here to 20 million cars/year. Elon seems more interested in accelerating EV adoption than making his shareholders rich, so we'll probably see more of these secondary offerings if they can happen on terms Tesla finds reasonably good.

Great except for the part where current shareholders' stakes are diluted.

by cremnob 13y ago

Great except for the part where current shareholders' stakes are diluted.

There is no scenario under which that wouldn't happen eventually. Tesla needs cash to fuel its next vehicle programs and growth. If it didn't get it, the growth story Shareholders should be glad, as I am, that they were able to raise at the price they did. They shown they can convert cash into value. They need to do it.

jamesaguilar 13y ago

The article doesn't say anything about that. I could be wrong, but I'm surprised if you can legally dilute a public stock.

tanzam75 13y ago
The article does not have to say it. When a company does a secondary offering, that is a dilution, by definition. Dilution by secondary offering does not require shareholder approval, up to a threshold. On the NASDAQ, the threshold is 20%. A company could, if it felt like it, dilute by 20% every single year for twenty years, and leave the original shareholders with 4% of the company. The theory is that because the secondary offering will take place at fair market value, the cash raised will adequately compensate the existing shareholders for the dilution.
- jamesaguilar 13y ago
  Ah, I see, that makes sense. I don't know what I was thinking. Of course selling stock is dilution, it's not like the company has extra stock it is holding in itself.
- calhoun137 13y ago
  After reading through all the comments in the dilution thread I think I finally understand: The value of a stock is determined by what people are willing to pay for it on the market, and if a company simply issues more stock, its entirely possible that the price of the stock will go up, go down, or stay the same. This is of course only true for public companies, and in the case of private companies dilution is a completely different issue.
adventured 13y ago
Lots of companies routinely dilute as a form of raising capital (to take advantage of a high valuation, or frequently out of desperation). This is one of the most common forms of funding for young (or weak), publicly traded biotech and pharma companies. It was very frequently done during the dotcom bubble days.
damoncali 13y ago
If you create more stock, you dilute the ownership of current holders. It's inherent in the concept of an offering, and very much legal.

kaib 13y ago

Can you expand on this a bit. Dilution itself is usually not a problem when fundraising, the expectation is that the new funds will increase the Net Present Value of the company more than the dilution. Are you saying this is not true or is there some functional reason why dilution is bad in this particular case?

damoncali 13y ago
Dilution is always bad. It means you own less of the company. It's necessary in order to finance a company like Tesla, but bad nonetheless. But the price of Tesla is not based on such things like cash flow and future profits. So I'm not sure it is bad - for now.
- marvin 13y ago
  The alternative to dilution is not having capital for expansion and getting crushed by competitors that do. So I dispute that dilution is in itself bad.
  - damoncali 13y ago
    Hence the "necessary to finance a company like Tesla".
- kaib 13y ago
  Owning less of a much larger pie does seems sensible from a monetary standpoint. It seems like you are optimizing for percentage ownership of the company instead of actual value of your stake?
  - damoncali 13y ago
    You are mixing up your definitions. Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted. Financing a company may create dilution and still put the shareholder in a better spot ultimately. For Tesla, a high-growth capital-intensive business, you can bet on the dilution part happening (they have to get the money from somewhere). The better off part is still an open question.

SatvikBeri 13y ago

This is generally not considered an issue. When you take investment, your %age ownership of the company goes down but the market cap increases according to the dollar amount you raised (or more, if investors are optimistic about your ability to use the cash.) So the value of your equity stays the same or increases.

adventured 13y ago
That's not true at all. The market cap does not inherently increase according to the dollar amount you raised. Cash on a balance sheet almost never gets a one to one value in a public corporation. In fact quite the opposite, it almost always gets a significant discount. If you need a great example of this, take a look at how the market valued Apple's cash vs market cap as their cash exploded to the moon rapidly while their market cap imploded (or Microsoft's similar demonstration a decade prior). Berkshire Hathaway has also regularly demonstrated this principle in action over the last 20 years. Cisco has been demonstrating it for a decade as well. None of these companies have seen their market valuations well supported or increased by huge cash positions, their cash is and was always heavily discounted (in the case of MSFT and AAPL it's not viewed as particularly valuable because it can't or won't likely be used to fuel growth, but rather discharged gradually as a modest dividend, or left to rot on the balance sheet earning very little; in the case of Berkshire, the market would rather see Buffett doing acquisitions or holding equities to boost the return (both of which he prefers to cash)). There are a lot of companies that are publicly traded, where if you calculated their cash as part of their market valuation, they'd be trading at extremely low discounts (eg AAPL at 6 times earnings). The market is simply telling you in those cases that it does not believe their cash is very valuable.
- SatvikBeri 13y ago
  The market cap does not inherently increase according to the dollar amount you raised. Good point. It all comes down to the (perceived) return on investment that a company can get using its cash. In cases where companies are selling stock to raise cash it's usually perceived that the company will be able to get a decent ROI. So in most cases where a company raises cash (through funding or sale of stock) their market value will stay constant or increase. This is Tesla's situation. In contrast Apple/Google/Cisco have shown very little ability to get a high return on investment on any additional cash, because they already have so much. This ROI is perceived by investors to be lower than what the investors could get on their own, which is why the cash is discounted.

revelation 13y ago

The stock has risen from 85 to 91 on the news and is now holding there for a few days already. You may have been diluted on percentages, but the money value of your stock has increased far more. Also note that a large part of this money was raised in convertible debt, where shares won't show up in the float for many years (certainly in Tesla-time-periods).

damoncali 13y ago

The dilution is peanuts compared to the premium they paid in the first place for Elon Musk's reality distortion field. edit: to further explain what I have apparently not (judging by the speed with which I got the first downvote), what I am saying is that Tesla trades at a massive premium to any normal way of valuing a public company - far more than the dilution of another offering. Clearly, the people investing in Tesla are not worried about dilution, and are betting on the Big Plan and the ability of Elon Musk to create something absolutely freaking massive. Either that, or they're just not doing the math. But I'd bet on the former.

jnw2 13y ago
Tesla strikes me as having a lot more growth potential than any other publicly traded company I'm aware of, if things go well for Tesla. I certainly think its value is based upon future earnings potential, and not current revenue.
- jnw2 13y ago
  On the other hand, if Tesla continues to raise funds every six months in a manner similar to the recent secondary offering, buying and holding the stock for a long time will probably not turn out to be the fantastic deal for shareholders that it has a good chance of being if Tesla chooses to bootstrap from here to 20 million cars/year. Elon seems more interested in accelerating EV adoption than making his shareholders rich, so we'll probably see more of these secondary offerings if they can happen on terms Tesla finds reasonably good.