Reuters points out that if Tesla prevails in court, Telsa will pay Elon $26 billion in stock-based compensation. SBC is reported as an expense on the income statement, which can be booked over eight quarters. However:
Dividing the $26 billion over eight quarters would reduce profit by $3.25 billion each quarter – more than Tesla’s net income for every quarter except four of the last 25 dating back to 2019.
This expense will affect net income, lower EPS, but will not affect free cash flow. Tesla has seen sales and margins decline this year, and this trend will likely continue now the EV tax credit has ended. It is likely Tesla will unprofitable (on paper) if the court reverses the lower court’s ruling.
The Accountant must have missed my post on dilution. Here it is again:
Suppose I have 100 Tesla shares valued at $100 each
Suppose Tesla doubles the number of shares issued
Suppose the market values Tesla shares at $200 each
My position goes from $10,000 to $20,000
Looking solely at the number of shares is looking at only half the issue, pun not intended. Check out the requirements of the pay package. We, the Shareholders, think it’s a great way to incentivize our CEO.
Your reasoning only looks at stock performance and does not consider business performance and earnings and cash flow that result from business performance.
And then your diluted share of those earnings and cash flow.
But, actually, I think you are on to something because tesla share price lost its connection to business performance a long time ago.
I love how your example here ignores dilution and just says “stock price double.”
And yet, that is the point … if the price goes up, the value of one’s holding goes up. Dilution certainly matters for a company that isn’t growing quickly, but for one that is growing well, the question is whether the dilution is worth the value derived, i.e., is Musk worth it.
Different question … if one didn’t expect revenue growth, then Tesla wouldn’t be a very sensible investment. If one’s interest was short term, the Musk provisions would be largely irrelevant.
Anyone who truly believes that Tesla will be giving Musk $878B in shares over the next few years should be BUYING Tesla stock hand over fist … because for that to happen, the company must grow dramatically.
I think you presented a false case here, because Musk already owns 13% of the company, so if those milestones were to be reached he would profit gigantically in addition to the pay package.
But what I think many people object to is that the package is so unfathomably huge. Here it is: It is 10 times the total cumulative pay of every other CEO in the S&P 500.
More than that, some of the milestones are laughably easy to reach. Last year Tesla sold 1.7 million vehicles. In order to reach the “20 million” goal in 10 years, they need to sell a mere 900,000 per year for the next 10 years. IOW, he can sell about half the number of cars and still make mega bucks. This is an incentive?
Personally, I object to a CEO using hand picked sycophants to set his pay package based on what he tells them to do. The knock-on effects of this throughout corporate America and the (so called) “compensation committees” is bound to be horrible.
And his complaint i that he doesn’t have 25% of the shares. Oh boo hoo, he sold off a bunch to buy his Twitter toy, which he has (inadvertently, I’m sure) used to destroy his own reputation and that of Tesla. And for this, he demands more control ; the board should be slapping him down and telling him to wise up.
Personally I think the best thing that could happen - for long-term corporate America - is for this whole folly to come crashing down, for CEO’s to walk through the wreckage, and for corporate boards to learn to stand up to the increasingly excessive demands of the CEO.
This is not correct. Let’s say Tesla is worth $1 trillion and your stake is $10,000. It doubles the number of shares. The company is still worth $1 trillion. No new value was created. But each share is only worth half as much, so your stake is now only worth $5,000.
If the stock price doubles, then your stake would be worth $10,000 after the dilution. In your example, the number of shares doubled but the market cap quadrupled. Obviously, that can’t be the case.
I realize that Tesla shareholders are happy with this arrangement, but realize Elon’s pay package is coming straight out of your wallet.
Also Google and Berkshire Hathaway created separate classes of stock after founding to give more control to certain stakeholders. Tesla could have done the same thing without the huge dilution.
Tesla isn’t growing quickly. It isn’t even growing. And remember the is the 2018 pay package we’re talking about. If it is approved, Elon will get about half the profits generated by Tesla in the entire history of the company and it all comes out of your wallet.
Wait a second! How many new shares are issued to Musk if the company market cap remains at $1T??? How did the number of shares double? Where did the new shares go exactly?
Not obvious at all! That’s the expectation of those who voted for the pay package.
Wrong! It’s coming out the pocket of the people buying Teslas shares.
Warren Buffett and others suggest that investors should think like business owners. Having been a business owner I know that is wrong. Think like an investor because that is what we are. Musk, on the other hand, can and should think like a Tesla owner.
The market could do that … it would have logic behind it … but just issuing more shares does nothing to the number of shares I own or to their price … that is set by the market.