Tesla to Raise $2 Billion from a Stock Offering

Shares of Tesla (TSLA) are down a few dollars this morning after the company said it will float $2 billion in stock.

I have a simple rule in these matters. A company may raise as much as they can get away with. By this I mean, raise as much to the point that it won’t hurt their stock.

Outside of a few percentage points today, shares of Tesla have rallied spectacularly since June. As such, it’s completely responsible to raise money from new investors. If people want to overpay for your stock, the company has every right to benefit from that.

On this issue, I’m a complete pragmatist. Companies shouldn’t worry about what economic models say. If the market is cool with it, then you’re right. If it’s not, then you’re wrong.

I wouldn’t be surprised if Tesla closes up today.

By the way, this raises an interesting theoretical point. If we view the market as a contest between a stock’s market price and its true underlying value, what Tesla is doing blurs that line.

An overvalued company can use its rich stock price to raise more capital which in turn raises its true underlying value. In turn, that can raise the share price.

During the dot-com bubble, we saw empty companies use their exalted share prices as currency to buy other empty companies. This was a great strategy, until it wasn’t.

Posted by on February 13th, 2020 at 9:10 am


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