) Chief Elon Musk was just granted a new package of stock-option
based incentives, detailed in the company's latest 10Q filing,
under "CEO Grant."
While these incentives are no doubt interesting to Musk -- given
he's the beneficiary -- they are, if anything, more interesting to
The significant features of the package are as follow (
full details here
- On August 13, 2012 (the Effective Date), Musk will be granted
an incentive package consisting of options equivalent to 5% of
Tesla's stock on issue, with an exercise price equal to the 30
day moving average stock price on the Effective Date (call it
- These options will be split into 10 tranches of roughly
510,000 shares each, to be vested based on a combination of
operational and market capitalization milestones.
- Considering the market capitalization milestones -- one
tranche will become "eligible" for vestment for every $4 billion
increase in Tesla's market cap -- from a starting point of its
market cap on August 13.
- The 10 operational milestones are linked to successfully
delivering alpha, beta, and production versions of the Model X
and Gen III vehicles, achieving aggregate vehicle deliveries of
100,000, 200,000, and 300,000, and achieving a gross margin
greater than 30% for four consecutive quarters.
There are three possibilities here:
- Musk has accepted targets that he has low expectations of
achieving for some other purpose, such as increasing investor
- Musk is hopelessly optimistic.
- Tesla's realistic growth potential over the next decade is
significantly greater than is widely acknowledged.
Musk does not seem the type to shrug off failure in the pursuit
of goals -- especially highly visible and explicitly documented
goals. While he might accept and even perhaps welcome ambitious
goals, I don't think he'd accept goals that he thought were
ludicrous. He has his pride, and I don't think he is planning to
see a headline like:
Musk Scores Two Out of 10 -- Underperforms, Limits Incentive
It's also drawing a long bow to suggest he's
optimistic. Optimistic, yes -- he wouldn't be a successful
entrepreneur otherwise, much less one who has founded automotive
space launch companies. However, his success in both of those
fields amply demonstrates that he's not away with the fairies. He
can get things done, and hence, must have a pretty good grasp of
the associated obstacles.
The implied growth potential is what's left after the first two
possibilities are exhausted. I'm inclined to assume a mix of the
three possibilities -- I think Musk would accept some goals he
thought were unrealistic, and that he's perhaps overconfident
regarding others. The remainder are those he is justifiably
confident in reaching.
Okay, So What?
To recap: There are 10 tranches, the entire package expires
after 10 years, and for
tranche, both an operational
a market capitalization target must be met. The former will drive
the latter, obviously, and I think Musk's success rate on the
operational targets will be 100%. But that's
100% on the operational targets earns him
achieves market capitalization targets. This is where the tale
becomes interesting for a Tesla investor.
The required market cap increase for
tranche is $4 billion. If Musk is going to vest one tranche per
year over the coming 10 years, then Tesla's market cap and share
price must do this:
(click image to enlarge)
The reason the market cap increase is linear while the share
price increase is not is that I'm allowing for significant dilution
of the shares currently issued: 5% per year of the previous year's
total for raising additional capital, and 2% per year as internal
incentives with a near-zero exercise price (in addition to the 0.5%
of the 2012 value received per year by Musk). Thus, these estimates
give Tesla the freedom to raise an additional $7 billion through
issuing new stock over the period in question; starting with around
$300 million in 2013 (or perhaps later this year), and increasing
to $1 billion-ish in 2021.
Now, I'm not saying that this is what is going to happen (and
even if it does, it will likely be biased either earlier or later).
Maybe Musk will only hit 50% of his targets, in which case the
appreciation in share price would be half as much (but still pretty
spectacular!). The point is that even a 50% hit rate would imply a
of room for growth in the stock, and I have a suspicion that Tesla
isn't expecting this level of growth through simply going
head-to-head with Toyota (
) and GM (
). Toyota made around 8 million cars in 2010, and its market cap is
$120 billion. Does Tesla expect to make 2.5 million cars in 2022 to
justify a $40 billion cap? It seems unlikely. I rather predict on
the order of 500,000 -- 1 million, but with higher margins and a
good growth story. Either way, to achieve such rapid market share
growth, and maintain margins, Tesla cannot just aim to be the next
How Will Tesla Deliver?
Differentiating on vehicles alone will not be enough -- Tesla
may make the best electric cars in the world, but the market will
become incredibly competitive. The vehicle spec sheet is not the
full story however -- Tesla's dealership strategy is significantly
different to that of its contemporaries (and heavily criticized,
much as Apple's was). Its infrastructure strategy has also started
to show hints of "Better Place" (which, in 2010, raised funding
from HSBC at a pre-money valuation of more than $1 billion on the
back of little more than an idea and prototype).
I increasingly suspect that Tesla's aim is not just to create
electric vehicles (EVs), but to create an entire EV ecosystem. An
exclusive infrastructure framework in particular could deliver the
lasting differentiation necessary to deliver the high margins and
high growth that are essential for Musk to chalk up another
"mission accomplished." Of course, conventional wisdom would
suggest open standards over walled gardens. If you get the package
right, however, walls work pretty well. Just ask Apple.
Tesla's stock has had a rough ride of late, and I think the
volatility may well continue over the coming two quarters as
sentiment swings back and forth. Mid-term, however, I'm inclined to
bet on Musk -- he has a history of playing to win, and winning, and
I can see the outlines of Tesla's vision clearly enough to be
confident that it's not just posturing. It's not a sure thing --
but neither was Apple at $30/share.
The focus today is (rightly) on the Model S, which Tesla must
execute well on to gain the strength for the next step, but it
can't be the full picture. Musk plainly has something up his
sleeve. You think he's signing "X" in this photo? He's just
stopping strategy from falling out.
It will be interesting to see what the coming Super-Charger
I am long [[TSLA]].
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