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The new pay deal for Tesla (NASDAQ: TSLA) CEO Elon Musk hasn’t helped the share price so far.
From a recent intra-day high of $474 on 3 November, Tesla shares have already fallen 15% by the time of writing (17 November).
Some of that will be down to the AI-led US tech stock rally stalling. And fair bit will also surely be just a sign of Tesla’s short-term volatility. But it’s worth reflecting on the implications of Musk’s potential payday for the share price.
Big targets
The target-driven deal could be worth close to a trillion dollars. As an aside, a UK headline asked us if we knew how many zeroes there are in a trillion. Spoiler — there are 12.
Now, that’s not in cash, it’s in Tesla stock. And whether Musk gets it all depends on some stretching targets. The big takeaway is that he’ll need to get the company’s market cap up to $8.5trn in 10 years.
To put that into perspective, the market cap is currently approximately $1.35trn. So he’d need to see the Tesla share price climb to around 6.3 times its current level. If Musk can do that, should shareholders really care how much he’s paid for it?
It would put the shares at about $2,500. Hmm, that’s around the sky-high target Cathie Wood, CEO of Ark Invest and the biggest Tesla bull I know, stunned the world with a while ago.
Driven by earnings
To get the share price up, a company’s management needs to grow earnings. It’s buyers and sellers like you and me who actually control the price — and we need to be upbeat about our chances of bigger future profits.
So what Elon Musk needs to do is boost Tesla’s earnings per share 6.3-fold and the market will take care of the share price, right? Well, not so fast.
That could do the trick, but only if investors remain willing to keep the stock’s price-to-earnings (P/E) ratio where it is today. And there’s clearly a huge amount of future earnings growth already built into the current valuation.
Even after recent Tesla share price falls, we’re still looking at a forecast P/E of 315. That’s by far the highest of the Magnificent 7 AI superstar stocks, at more than seven times the valuation of second-placed Nvidia on a multiple of 43.
What it means
To lift Tesla’s market cap as high as 8.5trn, while at the same time getting the P/E down only as far as Nvidia’s, by my calculation Musk would need to multiply earnings by a massive 46-fold in 10 years.
The chances of that happening are very much unknown. But I think we can be pretty confident that valuations like this are not about selling cars. No, it’s all the future generations of AI tech that investors hope Elon Musk can produce.
I’ve no idea how to evaluate all that, so I’m out. But I do intend to consider Tesla shares depending on what happens in the next year or two.
