"Just how much is Elon Musk worth to Tesla?
Investors gave two answers of sorts on Thursday. One is $48 billion -- the current value of the contested stock options Musk holds under the terms of his 2018 pay deal as chief executive officer. Tesla shareholders re-approved the award at the company's 2024 annual general meeting after it was blocked by a Delaware court in January for being excessive.
The other answer is $17 billion. That was the approximate increase in Tesla's market value Thursday -- almost 3% in percentage terms -- after Musk posted a chart on his X account showing the shareholder vote on his pay would pass. With some big institutions deciding at the last minute, the result previously wasn't clear, making the stock move a useful gauge of the investor response.
The positive reaction is counterintuitive given the dilutive effect of the CEO's stock options on other Tesla shareholders. Brokerage Bernstein estimated that diluted earnings per share would be roughly 10% higher if the stock options were canceled. Their status still isn't clear as the AGM vote doesn't change the court's verdict. But the show of shareholder support could strengthen an appeal, or give cover for a fresh award of similar magnitude. One way or another, Musk now seems more likely to get his shares.
So why are investors enthusiastic about being diluted? The obvious explanation is that they were worried about "key person risk" and think it has been meaningfully lowered by giving Musk greater control over Tesla. The threat of the CEO losing interest in the company was central to the arguments used by Tesla's board on its investor roadshow to convince them to vote for the pay deal.
Whether or not these threats were credible, they serve to highlight one of the board's own failings: succession planning. Making Tesla less dependent on Musk is part of its job.
Perspectives on just how essential Musk is to Tesla tend to be divided by different views of the company. Look at Tesla as the global leader in a tough but still fast-growing market for electric vehicles, as many professional investors do, and the company might be better off with a new CEO.
Musk has made clear he has lost interest in the business of driving down costs, which he called "chiseling pennies." Getting more out of less has been the essence of making cars at least since Toyota's revolution in lean manufacturing. Now Tesla appears to be ceding its cost advantage as the EV pioneer to Chinese companies.
View Tesla instead as a scrappy startup still capable of delivering exponential growth from new technologies and Musk is the man for the job. This is how a lot of individual shareholders see the company, and the CEO leaned extravagantly into their hopes in his AGM speech. When Tesla solves self-driving "robotaxis," it could be worth $5 trillion, he said, and $25 trillion once it has also mastered humanoid robots. Tesla's current market value is $582 billion, which is more than twice Toyota's. This year the EV pioneer will sell about a fifth as many vehicles as the world's bestselling carmaker.
The real key-person risk embodied by Musk might be less about technological development and more about storytelling. Others can bring products to market, but nobody else gets investors to attribute such massive value to them before they appear.
Since startups are ultimately in the financing business, this value can become a self-fulfilling prophecy as long as the technology eventually works.
This scenario played out for Tesla with EVs, and Musk is dangling the prospect that it will happen next with robotaxis.
No wonder the pay vote passed: Even investors who think Tesla has moved on from its startup days have nothing to gain from threatening its Musk premium." [1]
1. EXCHANGE --- Heard on the Street: Tesla Can't Be All About Elon Musk. Wilmot, Stephen. Wall Street Journal, Eastern edition; New York, N.Y.. 15 June 2024: B.12.
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