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Tesla's stock "too high imo" for many shareholders

By: Aaron Anandji

The end of June was nothing short of a total victory for American powertrain and automobile manufacturer Tesla. They officially overtook fossil fuel giant Exxon Mobil in market value, signaling a seismic shift in the importance of electric powered machinery and vehicles in relation to their non-renewable counterparts. And to top it off, Tesla also pulled ahead of Toyota, crowning it the most valuable automobile manufacturer in the world, breaking 200 Billion USD.

But not everyone is thrilled with this new development. Most notably concerned are many of Tesla’s shareholders. Ironically, Tesla’s stock price may be too high for the shareholders’ likings. Why? This is because Elon Musk is in for a large payday, which will happen at the expense of other stakeholders.

The terms of Elon’s bonus are simple; Tesla must be valued above a certain threshold, and hold that value for both a one-month and six-month long average. With this new milestone of 200 Billion, Elon has cleared the third round of an interesting pay scheme. And with Tesla’s recent valuation continually increasing at an exponential rate, it looks like there is not much standing in Musk’s way to a bonus worth billions.

So what is this bonus? And how does it hurt the shareholders? Elon Musk’s ridiculous payday comes in the form of stock options on Tesla. If all the above conditions are met, Elon can exercise the option to purchase about 1.69 million shares of Tesla for $350.02 USD each. As of market close on July 1st, Tesla is trading at $1119.63 USD per share. This could mean ludicrous profits for Musk when he eventually decides to liquidate his holdings. It should also be noted that this is not a one time purchase. Rather, these payouts could occur up to 12 times. He has already cleared two of these payouts. Passing the 200 Billion mark allows him to claim the 3rd. Once Tesla overcomes a certain valuation, Elon is afforded the option to buy more stock at a discounted price. However, many shareholders are disappointed that Musk is allowed to buy such an incredible volume of equity in Tesla at a highly discounted price. This is because it could potentially dilute and devalue their holdings. And that is something investors loathe. Plus, it eats into the operating capital of Tesla. Buying shares at a discounted price means that the company is selling equity for far less than what it could achieve on the open market. And this could total to an opportunity cost of billions.

However, the bonus is not completely bad news for investors. Many see Musk increasing his holdings in Tesla as a motivator for growing the company. Because Musk has to hop through various valuation hurdles, being guaranteed a payout may encourage him to take bolder steps. Plus, if Elon unlocks the 12th option, he would have to drag Tesla up to a whopping 650 Billion USD valuation. That is more than triple its current value. And if Musk can achieve this, the shareholders would rake in profits as well.

So far, this pay structure seems to be working. On July 1st 2019, Bloomberg placed the value of one share of Tesla at 227.17 USD. Today, as mentioned previously, Tesla is trading at 1119.63 USD. This is already over 200 USD higher than Tesla’s previous all-time high closing price on February 19th, with a value of USD. 917.42. And the increase is even more dramatic when you look at Tesla’s current price and juxtapose it to the March 18th closing price of 361.22 USD, when financial markets worldwide reeled from the effects of the covid-19 pandemic. What is the conclusion then? Well, whatever escapades Elon Musk and Tesla are up to seem to be working.

*All arguments made and viewpoints expressed within Youth In Politics and its nominal entities do not necessarily reflect the views of the writers or the organization as a whole.


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