Tesla Insiders Getting Out!
Value, Growth At A Reasonable Price, Long-Term Horizon, Oil & Gas
Seeking Alpha Analyst Since 2010
I have been interested in investing since I bought my first share of CAT stock when I was 13 years old. The concept of invested capital working for its owner and the impact that compounding can have over a long period has always fascinated me. I've had many successes and failures in the market and learned a lot along the way from my investment research and mentors. I am an avid reader of investment books and follow Warren Buffett most closely of the super-investors. In the past, I have informally managed investment accounts and provided investment advice to close friends and family. I'm a team leader for the supply chain management group of a major Oil and Gas operator. I have a bachelors degree from The Eli Broad School of Business at Michigan State University (Supply Chain Management) and an MBA from The Jones School of Business at Rice University.
- 28 inside sales since the last insider buy.
- Last insider buy @$767 per share.
- Why aren't insiders picking up shares on Tesla's way to the moon?
Tesla Model 3 hitting just after hitting a wall, as opposed to Tesla stock which is about to. (https://www.wmbfnews.com/2020/05/28/car-slams-into-building-myrtle-beach-no-one-injured/)
There has not been a single insider buy registered for Tesla since mid-February, before Covid-19 struck. These last two purchases were by Elon Musk (13,000+ shares) and director Lawrence [Larry] Ellison of Oracle fame (1250 shares) at a stock price of $767.
TSLA Institutional Buys and Sells | Tesla Inc - GuruFocus.com
(data pulled as of August 13, 2020)
Why do we think it's been 100% insider sales, to the tune of $166.23 million, since February? Here are my two guesses:
- Uncertainty on the macro picture and how the world is going to play out post recovery. Maybe people will not be as willing to spend excess income, especially on "wants" like new premium vehicles, and choose instead to save more due to the recognition that life and incomes can be insecure.
- More likely I believe, they recognize that the stock isn't an attractive risk/reward trade-off when trading at a market cap over $300B. At this price it gives them a window to exit and lock in some serious personal wealth.
Now Musk isn't able to sell for a couple of reasons - first, maintaining confidence in the future any stock that has run up this high & fast is paramount. If certain signals are flagged in the media about the Founder/CEO selling it has the potential to create a run down in the stock. Second, Musk has a 5 year holding period requirement for those shares granted as a part of his CEO Performance Award (Link to the SEC filing with more details below) per the stipulations in the official plan linked below.
SEC.gov - link to Tesla CEO Performance Award filing
Where does this leave the outsiders making purchases north of $1,600 today?
I believe there is a big segment of buyers being funneled together by one thing at this time - momentum. Algos, day-traders, and even cap weighted indexes are all chasing the stock higher even as insiders are selling to lock in gains. When this run peaks and the flows reverse there will be serious damage as everyone tries to exit at the same time.
Finally, Tesla will struggle to repeat profitability in coming quarters with sales in Europe falling off, reduced carbon credit income - a $400mil drag, and a big $213 million amortization "catch-up" charge for Musk's performance award resulting from the timing of milestones vesting ahead of schedule. Here is the exact quote from the 2Q20 10Q form:
During the third quarter of 2020, the second tranche vested and therefore the remaining unamortized expense of $95 million associated with such tranche, which was previously expected to be recognized ratably in future quarters through the first quarter of 2022 as determined on the grant date, will be accelerated into the third quarter of 2020. In addition, if the value of Tesla’s closing stock price continues near or higher than the levels seen in late July 2020, the third market capitalization milestone of $200.0 billion is expected to be met during the third quarter of 2020, meaning that the third tranche under the 2018 CEO Performance Award would vest upon certification by our Board of Directors. In such case, the remaining unamortized expense of $118 million for that tranche, which is currently expected to be recognized ratably in future quarters through the first quarter of 2023 as determined on the grant date, would be accelerated into the third quarter of 2020. See Note 11, Equity Incentive Plans—2018 CEO Performance Award, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details regarding the stock-based compensation relating to the 2018 CEO Performance Award.
In conclusion: Tesla is held primarily by weak hands chasing momentum, not long term investors estimating future cash flows of the business. Musk and his team have found ways to squeeze blood from a turnip to achieve financial goals, and this is unsurprising as it's how the board of directors have aligned the incentive structure for the CEO-founder (and you would expect he has driven similar alignment down through his management team).
This focus on market cap was demonstrated again earlier this week when, after the stock had drifted from $1,650 to $1,375 over about 3 weeks, Tesla announced a 5-1 stock split to kick-start the momentum trade again. Price and value are two different things - this split created zero value while increasing price significantly in the immediate term. This is a case where the board of directors is controlled by company management, not shareholders as it should be. The board, through its CEO Performance Award, created a poor set of targets that drive the wrong management behaviors and will harm Tesla owners over the medium/long term. Take your gains and walk away ahead - Tesla is a sell.
Analyst's Disclosure: I am/we are short TSLA.
We own Tesla Puts as a way to express our views on this company. $1420 puts dated October 2020 and $1000 - $1500 puts dated June 2021.
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