Elon Musk is about to get a lot richer
It's been a rough start to 2022 for the world's richest person. He's not too worried, though.
Elon Musk's holdings
of Tesla stock have lost about $30 billion this year through Monday's
close, as the stock slid 12%.But the next 12 months could be the most
lucrative ever for Musk. If analysts are correct, Tesla will report strong financial results this year that will net Musk billions of dollars in stock awards.
Musk doesn't receive any base salary or cash bonus from Tesla. Instead, he receives stock options based on the company hitting certain financial and market value targets. His 2018 pay package
allocated 101 million split-adjusted shares that would be awarded to
Musk in 12 equal tranches, as the company hit those benchmarks.
The
market value benchmarks have all been achieved, even though Tesla's
recent slide has removed it from the list of companies with a trillion-dollar market cap.
And seven of the financial targets have been hit so far, with two being
reached in 2019, two more in 2020, and three in the first nine months
of 2021. So he's already received 59 million of the 101 million options
in that package.
Analysts
expect Tesla to hit the remaining five financial targets this year to
give Musk all the options he possibly could get under that 2018 package.
If they're right, he'll qualify for four of the tranches this year -- a
record for him -- and one more in early 2023 once fourth quarter 2022
results are officially in the books.
"With
Tesla's growth trajectory, I'd be surprised if he doesn't get all five
tranches this year based on hitting all the triggers," said Dan Ives,
tech analyst for Wedbush Securities.
Each
of the tranches of options would give him the right to purchase 8.4
million shares of stock for the bargain price of $70.01 a share -- the
price of the stock when the options were first granted in 2018. At
Monday's closing price of $930, that means each tranche of options would
be worth $7.3 billion, and all five tranches would total $36.3 billion.
He's
very likely to qualify for at least one tranche of options, perhaps
two, when Tesla reports fourth-quarter results on Wednesday. He should
have at least three tranches in hand once the first-quarter results are
reported in April, and a fourth tranche by mid-year.
A big tax bill ... in 2027
However
many options Musk receives in the next 12 months, he probably won't
have to pay any taxes on them for about five years. That's because he'll
only have to pay taxes on the options once he exercises the options and
buys additional shares. And he's only likely to do that when the
options are about to expire.
He did that last year when he exercised 22.9 million options that had been due to expire in August of 2022, leaving him with a record $11 billion tax bill for last year.
These
latest options won't expire until January 2028, so he probably won't
exercise them until 2027. He hasn't yet had to pay taxes on the 59
million options he's already received as part of that 2018 pay package.
And he likely won't be paying taxes on any of the 42 million additional
options he is likely to receive over the course of the next 12 months,
no matter how much they are worth.
Sinking stock
The
biggest problem for Musk is that Tesla shares are having a particularly
bad year. He owns 177.7 million shares, in addition to the options he
already holds to buy an additional 59 million shares. That's the reason
for the massive hit to his net worth in 2022. Still, Forbes' real time billionaire tracker puts Musk's net worth at $241 billion.
Investors
have grown worried about riskier tech stocks, such as Tesla, as the
Federal Reserve moves to quash inflation with higher rates and less
stimulus. Tesla is worth more than the 10 largest automakers in the
world despite posting significantly smaller sales than each of them.
That makes it the poster child for a stock with a questionable
valuation.
"As you're seeing investors heading for the hills on risk, Tesla shares are caught in storm," said Ives.
During a deep sell-off in US stocks
on Monday, Tesla shares were down as much as 10% for the day at one
point. But they rallied back along with the rest of the market to close
down only 1.5%. Still, that was enough to shave $3.3 billion off of
Musk's net worth.
Many
analysts see the recent slide in Tesla shares as a temporary setback.
Tesla shares reversed a similar slide in early 2021 to end the year up
50%. Of analysts surveyed by Refinitiv, 18 have a buy or strong buy
recommendation on the shares, compared to 10 with a sell or strong sell
recommendation.
Ives
said the recent sell-off in Tesla shares, down 25% since its record
high in early November, makes Wednesday's earnings report particularly
important for investors. They'll want more information about plans to
ramp up production at two new factories and when it plans to roll out
the Cybertruck, its pickup truck, which will be facing competition from
pickups offered by established automakers like Ford (F) and an upstart EV maker, Rivian.
A disappointing report could feed into the sell-off, while a strong earnings report could turn around shares, Ives said.
"We think strong Tesla earnings could be a life raft for its shares," he said.
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