Elon's Not Going Anywhere

Among the many sources of consternation among TSLA investors lately is the future of Elon Musk as CEO of the company.

BoD Chair Robyn Denholm basically warns shareholders that if they fail to ratify Musk's 2018 pay plan, then he'll quit. One of our new favorite podcasts predicts "Musk is leaving no matter what you do." Others wonder if it's just time for him to go. The entire AGM proposal exercise is premised on what it would take to assure his continued employment.

That employment probably won't change, at least in the near future. The economics and mechanics of his equity in TSLA assures that.

In essence, he can't afford to quit now, based on what we know about his TSLA holdings. His departure would lead to a drastic decline in TSLA share price, which in turn could lead to significant short-term financial hardship for Musk. Not only would his absolute wealth decline precipitously. His personal balance sheet seems to depend on TSLA shares remaining at current levels, lest he get extremely sideways with some creditors.

What is TSLA?

By that we mean, is it a tech company or an automobile manufacturer? These days it trades like a megacap tech stock with a "superstar CEO", as Chancellor McCormick called him in her order rescinding his 2018 pay plan. It has a TTM P/E of 45, similar to META (43) and higher than MSFT (36), ORCL (35), AAPL (31), and GOOG (27).

Its core business remains making cars. Interesting and innovative ones, full of promise for FSD and AI and the rest of the imagined future for transportation, batteries, and robotics. Still ... autos, in which it competes, sometimes well and lately less-well, with a range of global manufacturers. Those companies trade at much cheaper prices, with a TTM P/E of well under 10 for most of them, call it 8 for our purposes.

It also trades like the only way investors can buy stock in Elon Musk. They of course cannot buy stock in any of his other private ventures, like SpaceX, xAI, and the rest. Matt Levine at Bloomberg, among others, observes this drives TSLA valuation to its current incredible levels.

If Musk leaves, TSLA shares transform quickly from a popular magnet for a certain type of meme-stock capital to those of the fourteenth-largest car maker in the world. TSLA shares trade at around $175 lately. At a P/E of 8, they decline to around $30/share. Then, many interesting things happen.

Musk's shares

Musk owns 411 million shares outright, worth about $72 billion today, plus options on 304 million shares, worth $53 billion (p. 151 of this year's proxy statement). This $125 billion constitutes a big chunk of his around $200 billion fortune. Of course the options have gone away (for now) after Chancellor McCormick rescinded the 2018 pay plan. For those who follow his personal balance sheet, the balance of his wealth consists of his stakes in his other ventures, principally SpaceX.

With TSLA at $30/share, Musk's wealth plunges precipitously. His owned shares decline in value from $72 billion to $13 billion, and the options from $53 billion to $9 billion. He suffers a hit of about $59 billion in his owned shares and $44 billion in his options, reducing his assets by over $100 billion.

Leaving TSLA could cut his fortune by half or more. It's not clear how much he cares where he sits on the list of global billionaires. The absolute decline in what amounts to paper wealth might not concern him greatly. What that means for his creditors almost certainly will.

Musk's pledges

We also see in the proxy that Musk has pledged 238 million of his owned shares. The proxy describes this as "collateral to secure certain personal indebtedness."

This means he pledged shares worth about $42 billion today as collateral against some loans. Creditors of course don't lend against the full value of a volatile asset like TSLA shares. Instead, they typically underwrite to 20% of the collateral. This means Musk could have debt of as much as $8 billion outstanding, subject to another limit (more below).

Bad things happen to that collateral with TSLA at $30/share. Its value plunges from $42 billion to $7 billion, down by $35 billion. With only(!) $7 billion of collateral, Musk can borrow about $1 billion, down from $8 billion. He would need to make up the decline of $35 billion in collateral value, or repay $7 billion of the loan.

He could pledge $35 billion in other collateral. With his personal fortune cut in half at that point, he would have to pledge a lot of his other investments. We doubt creditors would lend against these lliquid, unprofitable private companies at the standard 20% haircut.

He could also repay $7 billion of the loan outright, which means finding that much cash somewhere. He could sell more TSLA stock, after he said he won't. Even if he wanted to do so, he would need to sell $7 billion of $13 billion in TSLA shares (at $30/share), good luck doing that in a spiraling public stock. It would be understandable that the departing CEO would sell shares this way, yet nonetheless concerning to TSLA.

TSLA saw this coming?

For this very reason, most public companies limit how executives can pledge shares. In 2023 TSLA tightened those limits. The 2023 proxy statement indicated the CEO could borrow the lower of $3.5 billion or 25% of the value of pledged shares (p. 58-59). For Musk, 25% of his pledged shares is $10 billion, so the $3.5 billion limit applies. If Musk complies with this limit, his pledged shares secure debt of no more than $3.5 billion, not the $8 billion suggested by the pledged amount.

Also, TSLA discloses in the 2024 proxy statement that among all directors and executives, the actual value of loans is less than 1% of the value of pledged shares. The proxy indicates only Elon and Kimbal Musk pledged shares, with Kimbal accounting for under 1% of the total. Thus, the 1% figure pertains almost entirely to Elon. If we trust that disclosure, Musk's debt is under $500 million, not the $8 billion possible given the value of the pledged shares or $3.5 billion allowed under the pledging policy.

TSLA assures shareholders Musk complies with this limit and the BoD monitors his borrowing. On the one hand, it says this in a public proxy statement, and the SEC looks harshly at misrepresenting this sort of thing. On the other hand, it is Elon Musk, and this BoD has a way of overlooking when he plays fast and loose with rules and policies.

Even at only $500 million in debt, the consequences of a precipitous decline in TSLA share price resulting from Musk's departure could be dire for him. We guess this will tie Musk and TSLA together for awhile.