Tesla logo on rapid battery charging station (Photo Illustration by Karol Serewis)
Tesla’s
However, the heavy option plans do cost the company’s shareholders in a number of ways. The board is supposed to be focused on shareholder well-being, but keeping Elon happy looks to be an important goal.
The 3-part shareholder harm that is “hidden” (AKA ignored)
The first part of the harm is the dilution of current shareholders’ ownership
The increase in shares caused by the options issuance must be accounted for even though the options have not been exercised yet. Tesla’s dilution number is huge and growing:
For the first quarter of 2020, average shares outstanding were 915M. Adding in the shares represented by options produces the “diluted” share total of 994M, a 79M increase equal to an 8.6% dilution for the then-current shareholders.
After one year, the outstanding shares in first quarter 2021 were up to 961M, a 46M (+5%) increase. Even greater was the growth of the diluted share total to 1,133M, a 139M (14%) rise. Those shifts pushed the dilution up to 172M, a significant 17.9% dilution for current shareholders.
The second part of the harm is the misrepresentation of Tesla growth
The Wall Street Journal reported, “Tesla Posts Best Profit As Sales Surge 74%.” While that is true for overall revenues (vs. first quarter 2020), it is not the growth that current shareholders received. To calculate shareholder growth, the total sales have to converted to a per share number, and that means dividing by those diluted share total amounts.
- First quarter 2020: $5,985M sales divided by 994M diluted shares = $6.02 sales per share
- Second quarter 2021: $10,389M sales divided by 1,113M diluted shares = $9.17 sales per share
Therefore, shareholders received a sales growth benefit of 52% – a third less than the 74% company total being touted.
The third part of the harm is the misrepresentation of earnings
That WSJ article said total profit was $438M, below the average Wall Street expectation of $509M. However, you likely read that earnings per share were $0.93, well above the average estimate of about $0.79. So, what gives? “Stock-based compensation” (SBC) is the answer. It is the treatment of that expense that is the result of all that option issuance Tesla is doing.
The WSJ’s $438M is the accurate earnings amount, however that produces an earnings-per-share (using those diluted total shares) of only $0.39 – well under the $0.93 number broadly reported.
Note: Time for technical accounting talk. FASB (the Financial Accounting Standards Board) is responsible for determining the requirements for companies to produce accounting statements that are “GAAP” (i.e., meet the Generally Accepted Accounting Principles). GAAP requires companies to report stock-based compensation as an expense.
For the first quarter 2021, Tesla’s SBC amount was $614M. However, Tesla also reports, and many in Wall Street use, non-GAAP results. Pages 27-29 of Tesla’s first quarter update provide a “Reconciliation of GAAP to non-GAAP financial information.” These pages answer the earnings question. Starting with the actual GAAP earnings of $438M, Tesla adds back the large $614M SBC expense along with a $5M adjustment, producing a new earnings total of $1,057M. It is labeled, “Net income used in computing diluted EPS attributable to common shareholders (non-GAAP).”
For earnings per share, they start with the $0.39 GAAP amount, add back the $0.54 SBC expense, producing a non-GAAP $0.93 EPS.
Note: Many other companies also report non-GAAP earnings with adjustments meant to provide more insight into their operations. The problem with Tesla’s non-GAAP reporting is that their option program’s expense and dilution are so large that they are an integral part of how the company is being managed. Their weak rationale for having shareholders focus on non-GAAP numbers is visible in their “Non-GAAP financial information” footnote on page 29, shown here (underlining is mine):
“Consolidated financial information has been presented in accordance with GAAP as well as on a non-GAAP basis to supplement our consolidated financial results. These non-GAAP financial measures also facilitate management’s internal comparisons to Tesla’s historical performance as well as comparisons to the operating results of other companies. Management believes that it is useful to supplement its GAAP financial statements with this non-GAAP information because management uses such information internally for its operating, budgeting and financial planning purposes. Management also believes that presentation of the non-GAAP financial measures provides useful information to our investors regarding our financial condition and results of operations, so that investors can see through the eyes of Tesla management regarding important financial metrics that Tesla uses to run the business and allowing investors to better understand Tesla’s performance. Non-GAAP information is not prepared under a comprehensive set of accounting rules and, therefore, should only be read in conjunction with financial information reported under U.S. GAAP when understanding Tesla’s operating performance.”
Put it all together and the shareholder is on the losing side of the Tesla option program
This table tells the story: diluted ownership, diluted growth and misleading earnings.
Tesla GAAP and non-GAAP earnings comparison
The bottom line: How long will shareholders and Wall Street be willing to overlook reality?
Popular company leaders have gathered followings that persisted even when their story weakened. However, there is a point when investors move on. For Tesla, it could start this year if competition makes inroads and valuation comparisons make SBC expenses an issue.
