The New Tesla Stock Sale: Either Good For Company Or Investors

Tesla (TSLA) has decided to sell more stock. The company announced that it will sell shares directly into the market to raise approximately $5 billion. The announcement brings to mind two articles I wrote in the recent past. The first was entitled, The Feedback Effect That is Helping Drive Tesla. The point of that article was to note that an artificially high stock price can become, to a degree, a self-fulling prophecy because it allows a company to raise equity financing at a low cost of capital. In effect, the company receives a subsidy from investors who are willing to accept a lower return than the “true” cost capital. Given its sky-high stock price, Tesla can raise the $5 billion with only about a 1% dilution in the shares outstanding. If General Motors were to raise $5 billion in equity, it would have to dilute its shares by almost 12%. This amounts to quite a competitive advantage for Tesla

The second article titled, The Tesla Stock Split Experiment, took a careful look at the recent Tesla stock split. In the article, I noted that splitting a stock is like stating the price of a good in dollars instead of Japanese yen. The number of shares increases by a factor of five (in the case of Tesla’s split), but the underlying company does not change a lick. From the point of view of fundamentals, the stock price should drop by a factor of five when the actual split occurs exactly offsetting the increase in the number of shares. This means that if the market is responding to fundamentals, an announcement of a split should have no effect on the stock price. Of course, in the case of Tesla that is not what happened.  The last trade prior to the announcement of the split was at a price of $1,374.39 in the after-market on August 11. Within two minutes following the announcement, the price had jumped more than $100 in the after-market to 1,476.04 an increase of 7.40%. Over the next four days, there was no fundamental news about Tesla but a great deal of talk about the split and price kept rising. Over the full four days, Tesla rose $ 460.61 (in terms of pre-split prices) or 33.15%. In total the stock price of Tesla rose $460.61 adding $85.8 billion to Tesla market capitalization. But the run-up was not over. When the split shares began trading on August 31, the stock rocketed up another $287.65 to an effective pre-split price of $2,511 adding another $53.6 billion in market capitalization. And throughout all this there was virtually no fundamental news about Tesla. The entire episode suggests that the run-up was greatly influenced by investor psychology.

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DISCLAIMER: CORNELL CAPITAL GROUP LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE ...

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