• Wed. Oct 28th, 2020

Tesla is poised to surge another 16% amid signs it will use its lofty stock price to raise money, BofA says (TSLA) | Markets – Business Insider

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Summary List Placement

  • Bank of America on Wednesday boosted its Tesla price target to $550 from $350, implying a roughly 16% upside from Monday’s close.
  • Tesla on Tuesday announced plans to sell up to $5 billion in new shares, capitalizing on its recent rally.
  • The announcement “was evidence of our thesis that TSLA will utilize its stock to raise capital through low-cost equity offerings in order to accelerate aggressive capacity buildout plans globally and drive units/revenue substantially higher, further cementing its status as the dominant EV automaker,” analysts led by John Murphy wrote in a note.
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Tesla shares are poised to surge even higher in the next 12 months following its proposed $5 billion equity offering, according to Bank of America.

The firm on Wednesday boosted its Tesla price target to $550 from $350, implying a roughly 16% upside from Monday’s close. Tesla on Tuesday announced plans to sell up to $5 billion in new shares, capitalizing on its recent rally.

“In our view, yesterday’s announcement was evidence of our thesis that TSLA will utilize its stock to raise capital through low-cost equity offerings in order to accelerate aggressive capacity buildout plans globally and drive units/revenue substantially higher, further cementing its status as the dominant EV automaker,” analysts led by John Murphy wrote in a note.

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Shares of Tesla dipped as much as 8% in intraday trading on Wednesday.

The new price target came as Bank of America moved forward its “sliding scale of valuation based on the theoretical growth opportunity afforded to TSLA,” Murphy said. Bank of America reaffirmed its “neutral” rating on shares of the automaker.

Bank of America said it sees Tesla using its high stock price to raise more money through share sales, which boost cash holdings that can be used to enhance future earnings growth.

“It is important to recognize that the higher the upward spiral of TSLA’s stock goes, the cheaper capital becomes to fund growth, which is then rewarded by investors with a higher stock price,” Murphy said. “The inverse of this dynamic is also true, and it is this self-fulfilling framework that appears to explain the extreme moves in TSLA stock to the upside and downside.”

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While Tesla’s “hyper-growth is not necessarily self-funding,” it doesn’t need to be as long as the company has access to plentiful low-cost capital, Murphy said.

“Simply put, TSLA is a new disruptive (auto) company that may or may not be dominant in the long-term, but that does not matter as long as it can keep funding outsized growth with almost no cost capital driving capacity expansion,” he said.

Tesla has gained roughly 435% year to date.

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