Shareholders Back Elon - But It's the "What Comes Next" That We're Watching
What I need to see from Tesla ...
Tesla Inc. TSLA 0.00%↑ shareholders: You have spoken.
You want CEO Elon Musk’s $56 billion pay package reinstated — as a reward for achieving high-bar milestones.
Back in 2018, the Tesla board awarded Musk a broad performance-based compensation plan. He wasn’t given salary or cash bonuses. He was given 28 targets to achieve and 10 years to achieve them.
Central to the deal was a stock options package that was milestone-based — for instance, when Tesla hit $100 billion in market cap, then at every $50 billion beyond that … up to $650 billion. (Tesla’s market value hit $650 billion in late 2020.)
There were also operational milestones — including increasing revenue to $175 billion and adjusted gross earnings to $14 billion.
The pay deal is structured to deliver several rounds of stock options that will allow Musk to buy about 303 million Tesla shares — a package that’s worth roughly $54 billion.
The package also includes a requirement that Musk hold onto the shares for five years after he exercises the options, according to regulatory filings.
He’s almost cleared the entire list and had earned all but 25 million of the options available to him, according to Bloomberg.
The shareholder vote comes at a key juncture for the electric-vehicle pioneer. The stock is down about 40% from its 52-week high up near $300. EV sales are slowing. Tesla faces big challenges from rivals in China — both in that market and in price-sensitive markets around the world. Tesla’s size has made it less nimble and tougher to manage. It faces labor and legal issues.
And there’s the pay package spat.
In January, a Delaware court ruled against the package, stating that shareholders were not fully informed during the initial approval process. Delaware Chancery Judge Kathaleen McCormick ruled that Musk “improperly controlled the 2018 board process” and that Tesla didn’t fully inform investors about the ins and outs of the payout before they originally voted.
After the Delaware court ruling, in a letter to shareholders, Tesla Chairwoman Robyn Denholm urged stockholders to re-ratify the package, saying: “Elon has not been paid for any of his work for Tesla for the past six years that has helped to generate significant growth and stockholder value."
The pay package relates back to those afore-mentioned challenges, since many shareholders were worried that — if denied the compensation — Musk might hit the eject button and shift his focus to other interests — like space travel or artificial AI.
Musk himself raised that specter in January, posting on X that he wanted a quarter of the voting control of Tesla, or he might leave.
Denholm said the same thing, telling shareholders: "If Tesla is to retain Elon's attention and motivate him to continue to devote his time, energy, ambition and vision to deliver comparable results in the future, we must stand by our deal."
The shareholder vote isn’t binding — but it is a referendum, of sorts, on Musk’s leadership.
When it was Musk’s time to speak at the shareholder meeting, he jovially told the audience, “Hot damn! I love you guys.”
The victory is largely symbolic at this point — and the shareholder re-ratification doesn’t guarantee Musk will get the compensation package — since Tesla and Musk must still try to overturn Judge McCormick’s decision. Tesla also shifted its state of incorporation to Texas late this week. But even that won’t negate Judge McCormick’s ruling; Texas courts are bound to honor the Delaware ruling.
It could be that the Tesla board must start from scratch on a new comp plan — and not just “put a band-aid on it,” Charles Elson, a retired University of Delaware professor and a corporate governance expert told Bloomberg.
For Wealth Builders like us, the key moving forward after this vote is to to evaluate the long-term potential — and risks — with Tesla.
Will the Real Tesla Please Stand Up?
Tesla can be more than a car company, which is its appeal.
In early April, Bloomberg’s research arm, BloombergNEF, projected that Tesla’s charging network could generate $7.4 billion in revenue and $740 million in profit by 2030.
In 2022, Musk said Tesla’s robot, Optimus, will be “worth more than the car business and worth more than full-self driving (FSD).” It’s hard to pin an exact dollar amount on Optimus, but to get an idea of the magnitude, in a December 2023 research note, Morgan Stanley analysts said Optimus could disrupt 30% of the global labor market — a market worth $30 trillion.
And then there’s Dojo, Tesla’s super computer that trains the AI that powers the company’s self-driving software. In September 2023, Morgan Stanley said Dojo could add “$500 billion to the company’s market value.” Musk himself said Dojo is a risky bet for the company. But he also said the reward could be “in the multi-hundred-billion-dollar level.”
But so far in the first half of 2024, the “Tesla is just a car company” narrative is what’s sticking because of disappointing results.
Tesla reported a 9% revenue drop in the first quarter - the worst year-over-year decline since 2012.
In April, Tesla recalled nearly 4,000 of the November-launched Cybertruck pickups because of issues with the accelerator pedal. Instead of the usual remote software fix from the company, folks had to physically bring their vehicles in for repairs. Wedbush Securities analyst Dan Ives told The Guardian in April that the recall was another “black eye” for Tesla. “Cybertruck is the pedestal moment and a recall out of the gate is a bad look,” he added.
And remember my comment about the $740 million profit from the Supercharger network? That’s important because it’s a “differentiator” — it shows that Tesla could be more than “just a car company.” At the end of April, just a couple of weeks after that BloombergNEF report, Musk fired all or nearly all (reports vary) of the 500-person Supercharger department. The five-second rundown is Musk wanted to make more cuts to the division, while the head of the Supercharger initiative disagreed, saying it would undermine the business. So Musk got rid of the division. Then, Tesla rehired some of the Supercharger team in May.
The bottom line: We’re taking a thoughtful look at Tesla here at Stock Picker’s Corner (SPC) — before deciding if it’s still a Wealth Builder … or has become a Wealth Killer. I need to see:
How quickly this pay package issue can be resolved — to move it off the “Musk Distractions List.”
To be sure, once the pay plan is legally restored, that Musk’s focus and passion for Tesla are equally intact.
If the company can do a better job with “messaging” — framing the “proof points” that this is still a truly great venture in the making … that it’s still “more than a car company.” (For example, did you know Tesla was a retail electricity provider (REP) in Texas?)
And that Musk will continue to be the great thinker, innovator, leader and motivator that we know him to be — at Tesla.
At the shareholder meeting, Musk told folks: “I do deliver in the end. That’s the important thing.”
That’s right. And while others have forgotten that in this melee, let us not forget it. Elon Musk sure has delivered in the past — helping Tesla’s shares soar more than 1,000% higher in the last five years.
But that was then.
Wealth Builders focus on the “what comes next.”
And that’s what I’m watching.
📣SPC Updates
On Thursday I caught up with my good friend Matt Warder — the new helmsman at The Coal Trader. Matt is a former Wall Street analyst, who specialized in coal. And I worked with him for years (we actually shared a pretty unique office in a converted brownstone) in a historic part of Baltimore. So I know that Matt’s expertise in coal translates into some fascinating (and wealth-building) insights about energy in general, and in the commodities space, too. We plan to do an interview in the coming week about “Coal 101,” and I’ll get that out to you folks quickly.
“A few years from now, the artificial intelligence plans Apple Inc. AAPL 0.00%↑ announced at its 2024 WWDC keynote will be seen as a pivotal event for the company. But Wall Street, as usual, didn’t grasp its significance. AAPL stock fell 2% in reaction to the news. To quote Emperor Palpatine, ‘You will pay the price for your lack of vision’.” That’s why my friend, former colleague and Apple expert David Zeiler said in the first issue of his newly-launched Substack. “Wall Street” finally woke up, as the stock climbed 7% over the last week. It’s short-term confirmation of what Dave and I have been saying about Apple.
I’ll be back this week with an update about a company most folks think is in the restaurant industry … but is really a “tech” company in disguise. Shares are up 17% since I first talked about the company in February, and you’ll see why the stock price can keep climbing from here.
