CNBC is making a big deal of the fact that the wealth of Musk is now valued more than Warren Buffett’s.
https://www.cnbc.com/2020/07/13/elon-musk-is-now-worth-more-than-warren-buffett.html
Musk has a personal compensation plan that most investors think fitting, but I do not.
https://www.businessinsider.com/elon-musk-tesla-compensation-package-tranches-explainer
I happen to believe that Elon Musk is the greatest entrepreneur of our time. He creates visions of how we should use technology and design to improve our lives, then sets out the most ambitious goals and objectives, which he later accomplishes with stunning speed.
There is no question he is a remarkable human being. But the question is, does he deserve such riches?
In my view, I do not think that stock options based on share price are what investors should want to see. Stock promotion should not be the driver of share prices. Corporate earnings, cash flow, and dividends are what investors need. We would also like to see them grow.
You see, I believe in sustainable value, not in market fads. As an example, many years ago I wrote a blog about an associate of mine who founded and operated a technology company that barely made any money. Each year was the same as the previous ones. The individual barely took home a livable wage. His shares were worth maybe a million or two at most. Then along came the year 2000 and the Y2K narrative along with a growing interest in computer software and the Internet. Although his company had zero to do with the internet, it did have proprietary software and a client base who used it, somewhat. But when the stock market soared at the time, this person’s wealth zoomed. He had stock options based on the share price. Price-earnings multiples or price-to-cash flow multiples be damned, the person was now a billionaire, at least on paper. Could he sell his shares? No, because had he tried, the liquidity would have dried up, the share price collapsed, and the individual would have reverted to being a mini-millionaire. Well, it turned out that a few short months later, the stock market turned bearish. The Bear market of 2000-2002 was harsh. The individual’s stock collapsed, and went off the board. The technology was rapidly changing and I doubt that he could have found a buyer for his company then.
So, I have seen this incentive stock options dilemma before. It does not always work out, especially if based on market prices that often have little basis in reality.
Tesla stock now has a market cap of about $260 Billion. But corporate earnings are suspect. They are reported to be nominal but there are some analysts who do not believe they really exist. But even if they do, Tesla is an auto manufacturing company. Over say a three-year smoothing of earnings that would take into consideration the cyclic nature of the auto marketplace, let’s put a 40 PE multiple to TSLA. That would require an after-tax earnings level of $4.5 Billion. In the case of Tesla, that may be possible but highly unlikely. More to the point is that auto manufacturers will be under severe earnings pressure in the next several years and trade on average in the 10 PE range after business stabilizes.
I am not an auto industry analyst and I’m not one to short stock; but, I am making the point that Elon Musk, as great an entrepreneur as he is, should not be compensated on hyper-inflated stock prices that could collapse in a week or a month or two. Investors need to see stock prices that are sustainable based on earnings, cash flow, and dividends.
Even if Musk is able to pull the proverbial rabbit out of the hat, and produce a modicum of strong fundamentals, if he was paid on that basis he would not be the world’s 7th wealthiest person today.