What would you do with an extra $5 billion in cash?
That’s the question investors are asking Tesla CEO Elon Musk after this week’s announcement.
Tesla filed a document with the Securities and Exchange Commission on Tuesday announcing that it will issue new shares and sell them in the open market.
Tesla expects to receive about $5 billion from the shares.
This move comes in the wake of a tremendous run for shares of TSLA. The stock traded near $70 in March, but now changes hands for around $630.
That’s good for an 800% return!
Talking heads on the financial media channels have been speculating on what Tesla can do with this extra cash. But I haven’t heard much discussion about what’s really happening behind the scenes.
Once Elon Musk reveals his plan in full though, we’re going to see a big shakeup for a handful of key target stocks.
Allow me to explain…
A Perfect Time for a Stock Offering
Tesla’s decision to sell shares of stock was pretty much a no-brainer.
Given the stock’s meteoric 800% rise, it makes sense to sell some shares and take advantage of the rally.
Here’s how a transaction like this takes place.
The company essentially creates new shares and sells them to new investors. Now, I know what you might be thinking…
“So Zach, you’re saying Tesla just creates these new shares out of thin air?”
Yep, that’s exactly right!
A company can create new shares and sell them for real cash.
And when this happens, existing shareholders then own a smaller percentage of the total number of shares.
That may sound unfair to existing shareholders. But keep in mind, the company receives cash for the new shares it sells. And that cash can (and should) be put to use to help the company grow.
So if done right, this type of transaction can benefit all shareholders. The money that’s raised can be used to grow profits over time.
Now to be clear, I’m not suggesting you buy shares of TSLA right now. I think there’s simply too much risk of a pullback.
After all, the stock is trading for more than 160 times next year’s expected profits. And who knows if those expected profits will even materialize.
But with that said, I think it was a great decision for Tesla as a company, adding an extra $5 billion in cash to the company’s balance sheet.
Now, let’s figure out what the company is going to do with this extra cash…
Buyouts Are On the Horizon
You may remember us talking about using shares of stock for buyout deals earlier this year.
Since large tech stocks like Amazon, Apple and Tesla have surged higher, their shares can now be used to buy out smaller companies.
These buyouts can help large companies tap into new niche areas for new profits…
They can give large companies access to new technologies…
And they can even help take out competitors by buying rival companies.
Armed with an 800% gain in its stock price, I expect Tesla to make several acquisitions in the next few months.
These acquisitions can help Tesla compete in new markets, including self-driving cars, new 5G connectivity to link its existing cars to powerful software updates, and even smart-home electricity advances to help store energy.
But while the stock price is sharply higher right now, there’s no guarantee it will stay that way. And that’s why Elon Musk decided to sell shares right now.
Selling shares at today’s prices will let TSLA lock in $5 billion in cash it can spend at any time!
Keep in mind, when negotiating new buyout deals, companies being acquired often want some of the buyout to be paid in cash. The rest can be covered with shares of stock.
By raising $5 billion from selling shares now, Tesla will have plenty of options when negotiating the perfect buyout price for its new targets.
And don’t expect much of a delay when it comes to these buyouts, either. According to Elon, “We’re trying to spend money at the fastest rate that we can possibly spend it and not waste it.”
Reading between the lines, I’d say a buyout spree is right around the corner!
We’ll be keeping you updated on how the events transpire here at Rich Retirement Letter.