Tesla Upcoming Shareholder Vote: Will Elon Musk Get Paid?
When Zacks Rank #3 (Hold) stock Tesla (TSLA) went public over a decade ago, it was an obscure and relatively unknown niche automaker. At the time, there were plenty of reasons to doubt the company.
First, there had not been a successful automaker start-up in decades. The U.S. once had hundreds of automakers, but the vast majority failed, leaving the U.S. market with a few legacy automakers such as General Motors (GM), Ford (F), and Stellantis (STLA) (formerly Chrysler). Worse yet, Wall Street was recovering from the Global Financial Crisis of 2008, one of the worst recessions in a lifetime. Finally, Tesla only offered a very high-priced electric vehicle (EV) at the time -- not a business you want to be in following a brutal recession.
Against all odds, Tesla and its visionary CEO Elon Musk survived and thrived. Tesla began shipping its moderately priced vehicle, the Model S. Later, the company unveiled the Model X SUV and the mass-market Model 3. Ultimately, Musk’s “Master Plan” came to fruition: The company went from unprofitable to profitable, proved there was market for electric vehicles, and saw its stock trounce the S&P 500 Index and almost any other stock.
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Tesla Shareholder Vote: What you Need to Know
Unfortunately for Musk, Wall Street is a game of “what have you done for me lately?” Though Tesla’s long-term performance is undeniable, Wall Street banks focus on quarterly earnings. Over the past two years, Tesla has underperformed legacy automakers like Toyota (TM), GM and Ford. Higher interest rates have led to slowing demand for EVs, while the initial EV sugar high has worn off. Furthermore, Chinese EV competitors like BYD are proving to be formidable competitors to American makers, offering bargain basement prices (BYD has an EV that sells for less than $10K).
Regardless of the reasoning behind the underperformance, Tesla’s future will hang on the balance of the results of a vote at the June 13 annual shareholders meeting. In 2018, Tesla shareholders voted on a record-breaking pay package for Musk that seemed unattainable at the time: Musk would receive no compensation unless the company’s market cap soared by $50 billion (each $50 billion increase would result in a 1% stock reward for Musk). However, earlier this year, a Delaware court (where Tesla is incorporated) voided the plan, which would have paid Musk around $50 billion at current prices. Now, the fate of his compensation hangs in the balance of a shareholder vote next Thursday.
Pay Package: Will Tesla Shareholders Vote Yes?
Using the 2016 U.S. Presidential Election as a proxy, it’s safe to assume that predicting votes and opinions is difficult. Nearly every poll predicted that Hillary Clinton would defeat Donald Trump, and nearly every poll proved to be incorrect. I suspect that the same will hold true for the Tesla shareholder meeting. However, understanding the past can help investors predict the future more accurately.
5 Reasons make me believe shareholders will vote in favor of Musk’s pay, including:
1. Market Cap Gains Since Inception: Tesla went public at a $1.5 billion valuation 14 years ago. Today, Tesla’s valuation has ballooned to $500 billion. Sober, unbiased investors will understand the immaculate long-term performance.
2. A Bet on Tesla is a Bet on Elon: Musk has successfully steered the ship through good and bad times. Historians will recall that Steve Jobs was once booted from Apple (AAPL), and Musk himself was once fired from Paypal (PYPL). History proved that each firing was a monumental mistake.
3. Innovation Takes Time: Tesla investors invest in the company to capture innovation-sparked profits. Innovators like Musk always have doubters. The doubting of innovation is nothing new. In 1998, Nobel Prize-winning economist Paul Krugman proclaimed: “By 2005 or so, it will be clear that the internet’s impact on the economy has been no greater than the fax machines."
4. History: History doesn’t always repeat, but it does tend to repeat. Shareholders have voted for past Musk pay packages with an overwhelming 70% majority. Most investors own the stock because they believe in Musk.
5. Ron Baron: Baron is a billionaire investor who bet big on Tesla and was proven correct. Baron, who is Tesla’s largest shareholder, said he will vote in favor of the pay package. Baron not only has a billion in TSLA shares, but he also has significant influence because of his past success.
How Will Tesla Shares React?
TSLA’s post-shareholder stock move will be binary. Nevertheless, if the pay package is approved (as I expect it to be), the odds favor a rally in shares. A “yes” vote will illustrate renewed confidence in Elon Musk as CEO and the company’s direction. Meanwhile, the stock’s valuation is at multi-year lows and is heavily shorted (which should add fuel to the fire). Regardless of opinions or outcome, investors should prepare for volatility next week as the monumental decision looms.
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