Tesla Inc. is a car manufacturer that pitches itself, very successfully, as a technology hothouse. So perhaps it will take the most tech-like step possible in 2024: Announce a big stock buyback. Conversely, Tesla is a tech wannabe that is, in essence, a car manufacturer. In which case, maybe it will … launch a buyback.1
Tesla’s stock has had a miserable couple of months, dropping by roughly a quarter since its most recent peak in late December and risking its membership of the stock market’s Magnificent Seven. Meanwhile, that Detroit dinosaur General Motors Co. has been racing along since it announced a $10 billion buyback in November.
Elon Musk would surely scorn taking cues from GM (he reserves that for the likes of @ScottAdamsSays these days). But how about Silicon Valley? With Meta Platforms Inc., Uber Technologies Inc. and even Airbnb Inc. — which only went public a few years ago — announcing big buybacks and dividend debuts, Tesla’s chief executive might feel more comfortable hopping on that bandwagon. There are several tactical reasons to do so, albeit with one fundamental drawback.
Back in October 2022, Musk said on an earnings call that a potential buyback of perhaps $5 billion to $10 billion had been debated “extensively” by that hothouse of candid back-and-forth known as the Tesla board. Funnily enough, this came just after the stock had dropped by more than a quarter over the prior month. Even funnier, this all coincided with Musk’s tortuous takeover of Twitter Inc., now dubbed X, and his rampant selling of Tesla stock, fueling its dive as that year closed.
I wrote at the time that it made little sense to announce a buyback when Tesla was also touting a 50% annual growth target for vehicle production. Expansion like that requires a lot of cash, even before getting to the side hustles of humanoid robots and such. Plus, investors buy this stock, at huge earnings multiples, for the promise of growth. They want Tesla to do magic stuff with the cash, not give it back.
Some 16 months on, the growth target has just been ditched and Tesla’s latest magic trick, the Cybertruck, offers spectacle but leaves its audience a touch too baffled. The stock has spent February bouncing along sideways with a floor coalescing around $180, although it made a spirited run at $200 on Thursday. But with growth in electric vehicle sales slowing in general, no growth target and pressure on margins unlikely to have abated, weak sales or financial results come April could break that lower resistance. Meanwhile, Tesla’s board is surely having an extensive debate right now about how to pay Musk to stick around after he essentially threatened to take his artificial intelligence ideas — the Dojo mojo, as it were — elsewhere and a Delaware court then struck down his prior package. (Musk’s lawyers will discuss requesting a stay of that order with the litigant, pending a potential agreement).
A buyback would offer a counter to both of these unhelpful narratives. Yes, Tesla is “between two major growth waves” but here’s some money while you wait for the next one to raise you Mars-ward. And yes, keeping the Technoking onboard might require some major dilution of other shareholders, but Tesla could offset a bit of that with some repurchases — mostly optically, but anyway.2 With net cash of about $19 billion and forecast free cash flow of almost $14 billion over the next two years, it also looks affordable.
Buybacks are like accelerated dividends, declarations of better times to come and financial strength; not dissimilar to the various teases Musk sprinkles on earnings calls or his X account: The visions of robotaxis and robots or the potential for Tesla’s market cap to reach double that of Saudi Arabian Oil Co. (it’s currently about 30%).
In that sense, a Tesla buyback, even if aligned with the tech zeitgeist, would also have something in common not only with GM but those other old industrial giants struggling with a changing world: Oil majors. GM messed up badly on electrification and autonomy; the buyback buys time for a fix. Big Oil, meanwhile, is squeezed between the shadow of energy transition and the disinterest of tech-dazzled investors; mega-payouts keep it in the game until sentiment turns (maybe). This is the sort of company you might expect for an autos manufacturer, not an AI pioneer.
Therein lies the strategic risk around what looks like a tactical layup. Tesla’s problem in 2024 is that it is a growth stock now shorn of a growth target and lacking a clear, near-term catalyst. A buyback might provide that but only at the cost of confirming that Tesla needs it.
1There is an endless debate over Tesla's identity as either a car company, or an energy company, an artificial intelligence or technology company et al. But given that the selling and leasing of vehicles has generated 96% of Tesla's gross profit over the past three years, I'm going to lean toward car company.
2All else equal, if Tesla wanted to grant Musk enough stock to reach the 25% ownership threshold he has mentioned, this would require an extra 513 million shares, based on the current share count and Musk's existing stake of 12.9%. If Tesla first bought back $10 billion of its stock from non-Musk shareholders at the current price of about $194, the company would repurchase about 52 million shares. This would, by default, raise Musk's existing stake slightly to 13.1%, meaning Tesla would need to grant him instead about an extra 500 million shares to reach the 25% level. This assumes his existing options package is void following the Delaware judgment.
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