Friday, February 14, 2020
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Tesla rallies when most stocks would fall because those are the rules
On Thursday morning, Tesla announced that it would be selling 2.65 million shares in a stock offering. This offering was worth just over $2 billion as of Wednesday’s closing price.
Stock offerings, for the uninitiated, are dilutive. This means existing shareholders will own a smaller piece of the company after a stock offering than before. As a result, the price of a company's stock tends to drop following these events.
This is a normal thing that happens. What is less normal is a stock rallying 4.8% after such an offering. But normal things don't happen to Tesla shares.
And that is because the story for Tesla right now is also not normal. Collaborative Fund's Morgan Housel on Thursday tweeted a simple outline of how investors are seeing the Tesla story.
People think Tesla will do well --> stock surge.— Morgan Housel (@morganhousel) February 13, 2020
Stock surge --> raise tons of cash.
Tons of cash --> will help Tesla do well. https://t.co/1Qzilouk48
Again, the negative read on stock offerings is largely because these events are viewed through the prism of what investors are losing — a portion of their stake in the company — rather than what the company is gaining.
But as Matt Levine at Bloomberg outlined on Thursday, Tesla’s equity raise also sees the company use the stock market in the way it was intended, but isn’t often used. Which is primarily to raise money.
The public market allows companies to raise money from a lot of investors all at once. Except large pools of money in private equity, venture capital, and direct lending has made this option less attractive and less of a necessity.
“Big public companies now mostly use the stock market as a way to return capital to investors; U.S. public companies now buy back hundreds of billions of dollars more stock than they sell,” Levine wrote Thursday. “Once you accept the consensus that public companies don’t benefit directly from their stock prices, you start to wonder why a company would want to be public at all.”
Of course, Elon Musk himself agreed not too long ago. Except now, Tesla’s stock price is up a lot. And so Musk has made the fairly straightforward decision to benefit from that increase.
Now, in its fourth quarter earnings report, Tesla said the company has grown to the point of being self funding. In other words, Tesla doesn’t — or didn’t — need any more investor capital to continue growing at the rate it hopes to grow.
But as Housel outlines above, a way to read the rally in Tesla’s stock — both before Thursday’s announcement and particularly after this news — is to see it as the market essentially asking the company to take on more capital to grow more quickly.
And so it did.
What to watch today
8:30 a.m. ET: Import Price Index month-on-month, January (-0.2% expected, 0.3% in December)
8:30 a.m. ET: Retail Sales month-on-month, January (0.3% expected, 0.3% in December); Retail Sales excluding Auto month-on-month, January (0.3% expected, 0.7% in December); Retail Sales excluding Auto & Gas month-on-month, January (0.3% expected, 0.5% in December)
9:15 a.m. ET: Industrial Production month-on-month, January (-0.2% expected, -0.3% in December)
9:15 a.m. ET: Capacity Utilization, January (76.8% expected, 77.0% in December)
10 a.m. ET: University of Michigan Sentiment, February preliminary (99.2 expected, 99.8 prior)
[Yahoo Finance UK]
Nvidia earnings beat expectations [Yahoo Finance]
Some target date funds from T. Rowe Price are now 98% stocks [Yahoo Finance]
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