I mean, wouldn’t you?

Tesla Inc. is taking advantage of its surging shares by going back to the capital markets for the third time in ten months and raising as much as $5 billion of common stock.

The emphasis is mine, but the logic is obvious. If you have a product for which the market is willing to pay virtually anything, you sell more of it. That’s true for electric cars and it’s just as true for stock, which is far easier to manufacture.

Tesla’s latest stock sale occupies two realities at once. The first is pretty straightforward:

Issuing $5 billion a year ago would have meant dilution of more than 8%; today, it’s less than 1%. The forward price/earnings ratio — using adjusted earnings(1), that is — has swelled from about 60 times to about 170 times. In effect, the market has a megaphone positioned just next to CEO Elon Musk’s ear, through which it shouts a constant refrain of “Feed Me!” He has, quite rationally, served up another meal.

The second reality consists mainly of questions that — with the market cap at $600 billion and Tesla poised to enter the S&P 500 — feel ever more rhetorical but should be asked nonetheless.

Why is a company that has been listed for 10 years issuing yet more stock; so much so, in fact, that 2020 will account for 70% of all the equity it has ever sold publicly?(2) 

Why do so when, at the beginning of the year, Tesla believed it had “grown to the point of being self-funding”(3) and, as recently as October, said it had “sufficient liquidity”(4) to fund its expenses and expansion plans?

Why raise $5 billion of what is nominally the most expensive type of capital now, when consensus estimates contend Tesla will generate $7.5 billion of free cash flow between now and the end of 2022?

Why is the latest $5 billion sale, like the previous one announced mere months ago, being done as an at-the-money issuance, not usually the preserve of S&P-adjacent companies that believe themselves at the point of being self-funding?

The first reality dictates that you sell more stock because you can. Case closed. The second reality is thornier. For me, being at the point of self-funding or having sufficient liquidity — whatever those phrases are taken to mean —  just doesn’t sit well with three giant capital raises being announced in one year. Companies don’t generally carry $20 billion of effectively zero-yielding cash(6) — raised largely via new stock — on their balance sheet just on a whim. Yes you can, obviously, but it rather suggests you need the money.

One interpretation could be that Tesla’s valuation, which now eclipses the rest of the automotive industry combined, requires a pace of growth that its own cash flows can’t finance. Trailing free cash flow through the third quarter was $1.9 billion, of which $1.3 billion is effectively accounted for by sales of regulatory credits.

There is nothing wrong with Tesla selling regulatory credits; that’s how the electric vehicle market happens to be structured in many places right now. But such amounts, exposed to the vagaries of politics, can’t fund expansion fast enough to justify a $600 billion market cap. That’s especially so when, despite Tesla’s dominant position in the U.S. electric vehicle market, it faces far more competition overseas(5). Maybe the overall market will grow fast enough to offset the impact of that competition; but doing so tends to require more spending nonetheless.

When Musk published his “Secret Tesla Motors Master Plan” 14 years ago, the gist of it was that Tesla would sell small numbers of expensive cars and use the money to then make and sell a bigger quantity of less-expensive cars and so on. Things started out that way, but appear to have morphed into selling something far more expensive and available: stock. In effect, he can capitalize on the current bubble to recapitalize the business so that it can continue to work toward justifying such exuberance.

Fans of electric cars (beyond just Teslas) should be pleased; new technologies often entail large amounts of capital being burned as they emerge, but the losses get forgotten and the technology endures. Fans of oil should be terrified; their favored product remains dominant, but its producers couldn’t give their stock away right now. As for Tesla bulls sitting on massive gains, dreaming of a $1 trillion market cap and being asked to buy more, what will they do? That’s a rhetorical question.

(1) These ignore the dilutive effect of stock-based compensation, which has a pleasing circularity in this context.

(2) This assumes that both of the at-the-money stock sales announced this year are completed this year.

(3) Results announcement for 4Q 2019, published January 29, 2020.

(4) Results announcement for 3Q 2020, published October 21, 2020.

(5) This is the pro forma amount of cash Tesla will have after issuance, according to Joel Levington, a senior credit analyst with Bloomberg Intelligence.

(6) Tesla’s estimated share of the battery-electric vehicle market in 3Q 2020 was 77% in the U.S. but just 13% in China and 13% in the eight largest European markets combined. Source: Barclays.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.

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