Can you expand on this a bit. Dilution itself is usually not a problem when fundraising, the expectation is that the new funds will increase the Net Present Value of the company more than the dilution. Are you saying this is not true or is there some functional reason why dilution is bad in this particular case?
The alternative to dilution is not having capital for expansion and getting crushed by competitors that do. So I dispute that dilution is in itself bad.
Owning less of a much larger pie does seems sensible from a monetary standpoint. It seems like you are optimizing for percentage ownership of the company instead of actual value of your stake?
Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted.
Financing a company may create dilution and still put the shareholder in a better spot ultimately. For Tesla, a high-growth capital-intensive business, you can bet on the dilution part happening (they have to get the money from somewhere). The better off part is still an open question.
>Dilution is defined as the reduced ownership in a company. It is 100%, always, take-it-to-the-bank, written-in-stone bad for the shareholder who gets diluted.
No, this isn't true at all. If it were, companies would never issue new shares, since shareholders wouldn't allow it.
That's not what "dilution" means. Dilution necessarily reduces the per share value of the stock. Always. That is the definition of the word. Shareholders allow it because the company gets money in return for that dilution, which will presumably increase the value of their shares over time.
>Dilution necessarily reduces the per share value of the stock. Always.
No. This is wrong. Dilution is the reduction in percentage of ownership of the company, not a reduction in the stock price. It may reduce, increase, or leave the price of the stock unchanged depending on whether or not the market thinks the company will make good use of the incoming money.
I hate to turn this into finance 101, but there seems to be some confusion here.
Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.
You cannot increase the number of shares in a company without decreasing the value of the shares. This is a hard, mathematical relationship.
Dilution is not financing. Dilution does not change the value of a company. Dilution is bad. When someone way up this thread quipped "yeah, it's great except for the dilution" (paraphrased), that is what he meant (I think - forgive me if I misread). In other words, "Yawn. Tesla is still in business".
Everyone seems to be confusing the definition of dilution with the reasons someone might choose to be diluted.
>I hate to turn this into finance 101, but there seems to be some confusion here.
There does indeed seem to be some confusion. The problem is you're the one who is confused.
>Owner a has 50 shares. Owner B has 50 shares. Total is 100 shares. They decide they want to give Jim Bob some shares for his birthday. They issue 50 more shares to do so. Owners A and B have been diluted and the value of their shares has decreased. That is dilution.
The part where they issued new shares is dilution. But the part where they give them away, guaranteeing a drop in the price of the stock, is not.
In the real world corporations don't give stock away. They will sell those 50 shares on the open market and use the money to, say, buy capital equipment. In most cases the price of the shares will remain unchanged, because the value of the company's assets have increased by a corresponding amount. The price is absolutely not guaranteed to go down.
Issuing new shares has no more effect on the share price than raising capital through other means like borrowing from the bank or issuing bonds.
What people are getting at is that if at the same time as the dilution the market places a greater value on shares (due to what they think a company can do with the money). Then they don't necessarily have to lose value over the short term.
This is sort of silly - they're trading the new shares for lots of money, which now belongs to everyone who owns the shares. So they own a smaller share of the total company, but that company now includes itself plus $500M in new money that wasn't there before. If the company is properly priced at the moment, it's a net neutral transaction. If it's overpriced, it's great for the current shareholders.
This has thead has gotten a bit out of context. I don't have anything more to add. I was trying to explain why the original post felt the need to point out that dilution is bad for shareholders, and apparently did a poor job.
This is generally not considered an issue. When you take investment, your %age ownership of the company goes down but the market cap increases according to the dollar amount you raised (or more, if investors are optimistic about your ability to use the cash.) So the value of your equity stays the same or increases.
That's not true at all. The market cap does not inherently increase according to the dollar amount you raised.
Cash on a balance sheet almost never gets a one to one value in a public corporation. In fact quite the opposite, it almost always gets a significant discount.
If you need a great example of this, take a look at how the market valued Apple's cash vs market cap as their cash exploded to the moon rapidly while their market cap imploded (or Microsoft's similar demonstration a decade prior). Berkshire Hathaway has also regularly demonstrated this principle in action over the last 20 years. Cisco has been demonstrating it for a decade as well. None of these companies have seen their market valuations well supported or increased by huge cash positions, their cash is and was always heavily discounted (in the case of MSFT and AAPL it's not viewed as particularly valuable because it can't or won't likely be used to fuel growth, but rather discharged gradually as a modest dividend, or left to rot on the balance sheet earning very little; in the case of Berkshire, the market would rather see Buffett doing acquisitions or holding equities to boost the return (both of which he prefers to cash)).
There are a lot of companies that are publicly traded, where if you calculated their cash as part of their market valuation, they'd be trading at extremely low discounts (eg AAPL at 6 times earnings). The market is simply telling you in those cases that it does not believe their cash is very valuable.
The market cap does not inherently increase according to the dollar amount you raised.
Good point. It all comes down to the (perceived) return on investment that a company can get using its cash.
In cases where companies are selling stock to raise cash it's usually perceived that the company will be able to get a decent ROI. So in most cases where a company raises cash (through funding or sale of stock) their market value will stay constant or increase. This is Tesla's situation.
In contrast Apple/Google/Cisco have shown very little ability to get a high return on investment on any additional cash, because they already have so much. This ROI is perceived by investors to be lower than what the investors could get on their own, which is why the cash is discounted.
The dilution is peanuts compared to the premium they paid in the first place for Elon Musk's reality distortion field.
edit: to further explain what I have apparently not (judging by the speed with which I got the first downvote), what I am saying is that Tesla trades at a massive premium to any normal way of valuing a public company - far more than the dilution of another offering. Clearly, the people investing in Tesla are not worried about dilution, and are betting on the Big Plan and the ability of Elon Musk to create something absolutely freaking massive. Either that, or they're just not doing the math. But I'd bet on the former.
Tesla strikes me as having a lot more growth potential than any other publicly traded company I'm aware of, if things go well for Tesla. I certainly think its value is based upon future earnings potential, and not current revenue.
On the other hand, if Tesla continues to raise funds every six months in a manner similar to the recent secondary offering, buying and holding the stock for a long time will probably not turn out to be the fantastic deal for shareholders that it has a good chance of being if Tesla chooses to bootstrap from here to 20 million cars/year.
Elon seems more interested in accelerating EV adoption than making his shareholders rich, so we'll probably see more of these secondary offerings if they can happen on terms Tesla finds reasonably good.
The stock has risen from 85 to 91 on the news and is now holding there for a few days already. You may have been diluted on percentages, but the money value of your stock has increased far more.
Also note that a large part of this money was raised in convertible debt, where shares won't show up in the float for many years (certainly in Tesla-time-periods).
There is no scenario under which that wouldn't happen eventually. Tesla needs cash to fuel its next vehicle programs and growth. If it didn't get it, the growth story Shareholders should be glad, as I am, that they were able to raise at the price they did. They shown they can convert cash into value. They need to do it.
The article does not have to say it. When a company does a secondary offering, that is a dilution, by definition.
Dilution by secondary offering does not require shareholder approval, up to a threshold. On the NASDAQ, the threshold is 20%. A company could, if it felt like it, dilute by 20% every single year for twenty years, and leave the original shareholders with 4% of the company.
The theory is that because the secondary offering will take place at fair market value, the cash raised will adequately compensate the existing shareholders for the dilution.
After reading through all the comments in the dilution thread I think I finally understand:
The value of a stock is determined by what people are willing to pay for it on the market, and if a company simply issues more stock, its entirely possible that the price of the stock will go up, go down, or stay the same.
This is of course only true for public companies, and in the case of private companies dilution is a completely different issue.
Ah, I see, that makes sense. I don't know what I was thinking. Of course selling stock is dilution, it's not like the company has extra stock it is holding in itself.
