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Friday, February 14, 2020
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Tesla rallies when most stocks would fall because those are the rules
If last week's action hadn't already sent you a clear enough signal that Tesla (TSLA) shares play by their own rules, maybe Thursday did the trick.
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.
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.