Tesla has become the largest auto-maker in America as measured by market capitalization even though it produces a small fraction of the cars that General Motors produces. Tesla produced about 84,000 cars last year. General Motors produced over 10 million.
Yup, I know, Tesla is different than the other U.S. auto makers. Tesla is a growth stock. You hear it from the analysts whose banks regularly underwrite securities for Tesla that Tesla has a cult following. It is more like Apple than General Motors.
That’s possible, but do you want to invest your money in a company that is burning cash at a rate of over $2.5 billion per year to ramp up production for a mass market electric car?
Stock market investors don’t seem to care, but in the bond market where the downside is often many multiples of the upside, investors are becoming weary of Tesla’s cash burn.
The WSJ reports here that a Tesla bond issued only 10 days ago at par has already dropped more than 2%.
Tesla Inc.’s TSLA -2.76% first bonds have fallen more than 2% in price since their issuance 10 days ago, the latest sign of Wall Street’s ambivalence over the electric-car maker’s prospects.
The Palo Alto, Calif., company sold $1.8 billion of low-rated bonds on Aug. 11 to help pay for the Model 3, its first mass-market car. Tesla took advantage of investors’ thirst for higher-yielding securities, selling debt at an annual yield of 5.3%—more than 3 percentage points above comparable Treasurys.
But many investors sat out the deal, questioning the wisdom of buying bonds from a company that hasn’t turned an annual profit and is drastically increasing its spending in a bid to break into the capital-intensive auto market.
Read more here.
Jeremy Jones, CFA
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