Tesla (TSLA) Falls as Musk Says He May Sell Portion of Holdings

Share prices for electric car company Tesla, Inc. (TSLA) slid by as much as 5% Monday morning after its CEO Elon Musk said he might soon exercise his stock options that are due to expire next year. Musk's options do not qualify for preferential tax treatment, meaning that he could be on the hook for a massive tax bill if he doesn't sell the options. The sale of Tesla shares by its CEO could also have implications for the company's stock price. 

As of this writing, Tesla's stock has slightly recovered from its fall earlier this morning and is trading at $1,188.23, still down 3% from its opening price.

Key Takeaways

  • Tesla's shares are falling because its CEO Elon Musk may end up exercising his options and selling as much as 10% of his holdings.
  • Musk owns 17% of the electric car company.
  • The expected sale by the CEO could trigger a price decline in the company's shares.

A Twitter Poll   

The story began Friday, Nov. 5, when Musk polled his followers on Twitter on whether he should sell 10% of his holdings in the electric vehicle (EV) company. Around 58% of the 3.5 million people who participated in the poll voted "Yes." In his tweets, the CEO promised to abide by the poll's results.

Musk has become the world's richest person, thanks largely to a surge in the share price of his electric car company. He owns approximately 17% of Tesla, worth around $200 billion at current prices. Over the years, Musk has been granted stock options that are tied to the company's performance. In 2012, he was awarded 22.8 million options at a strike price (a purchase price for the options) of $6.28. Since Tesla shares now trade upwards of $1,000, Musk stands to make a massive profit by purchasing them at the strike price and reselling them in the open market. The options, which have already vested, are set to expire in August 2022. 

If Musk does not exercise the options, they could expire worthless. But that would mean forgoing billions of dollars in salary for no specific reason and paying a hefty tax on them because his options do not qualify for preferential treatment. This means that he cannot hold onto them indefinitely and not expect to pay taxes on them.

According to reports, the options will incur a significant tax liability of as much as 54% of the total gain because they will be taxed as ordinary income tax rates. Estimates for Musk's tax bill range from between $10 billion to $15 billion, and experts have described the options as a "ticking tax time bomb."

What Are the Implications of Musk's Stock Sale? 

Given his sizeable holdings in the company, Tesla CEO Elon Musk's decision to sell stock has implications for its stock price. The effect is related to whether Musk decides to sell his shares in batches or in one go. The latter event might trigger a temporary decline in the company's share price because Musk's sale will consist of new stock that is added to existing pool of Tesla shares. It will exert downward pressure on the company's share price until buyers are found. Hedge funds and large investment firms could also try to front run Musk's dump of his stock holdings and further squelch the share price.

A decline in Tesla's share price might not be an unwelcome development. The company's stock price skyrocketed during the pandemic shutdown and surpassed the trillion-dollar valuation mark recently. But that surge has produced a mismatch between its current earnings and price. For example, Tesla stock trades at a hefty P/E ratio of 387.1 on last year's earnings. In comparison, Ford Motor Company (F) and General Motors Company (GM) have P/E ratios of 27.92 and 7.96, respectively.

Analysts remain largely bullish on Tesla's prospects. "The underlying growth story for EV demand skyrocketing globally is the key fundamental driver for Musk & Co. into 2022," wrote Wedbush Securities analyst Dan Ives in a note. He pointed to the Biden administration's infrastructure plan as the generator of a "green tidal wave" that would benefit the EV industry.

According to Ives, Musk's sale of 10% of his holdings was a "digestible number" for the stock market. "We would rather Musk rip the band-aid off now and sell this portion of stock rather than it lingering over the next year and feeding into any non-fundamental bear thesis on the story,” he wrote. 

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