General Discussion: 2018 Investor Roundtable

[Reciprocity]

For general entertainment purposes. You're welcome!
View attachment 275427

He is right, the bar was set low and Elon should easily surpass those goals. Elon had already stated that he believes Tesla is a trillion dollar company in 10 years, so that is already ~40% higher then required by the compensation plan.

Let's assume the model 3 ramp continues as most recently guided to 5k/w in Q2. From their it's less about inventing a new way to produce cars and more about scale and duplication and expansion. To get from 50B to 650B, it's simply a matter of copy and paste many model 3 lines and gigafactories. There will be a model Y ramp in there somewhere but it should be less painful as it will be based on working model 3 lines and working pack automation and the same suppliers with few exceptions.

My only question is when and how much cap raise will be required for this duplication and expansion. The compensation plan doesn't seem to restrict that at all as the rewards are 1% of shares at the time the goals are met? I'm fine with cap raises as long as it's too accelerate expansion. Not so happy if it's about struggling through the model 3 ramp.

 

[mongo]

The compensation plan doesn't seem to restrict that at all as the rewards are 1% of shares at the time the goals are met?

The 1% number is based off Jan 19, 2018 share count and price, all reward levels are locked in already.

Total size: 12% of total outstanding shares as of January 19, 2018, the last trading
day prior to the grant date of January 21, 2018 (approximately 20.3 million option
shares)
Number of Vesting Tranches: 12 tranches; 1% of total outstanding shares as of
January 19, 2018 per tranche

Exercise Price Fair Market Value (FMV) of Tesla common stock on the date of grant, January 21,
2018, which was $350.02 per share (based on the closing price on January 19, 2018,
the last trading day prior to the grant date).

 

[Reciprocity]

The 1% number is based off Jan 19, 2018 share count and price, all reward levels are locked in already.

Thanks for the clarification. I have zero problem with cap raises for the right reasons. Would prefer other forms of funding, but time to market has a tremendous value at this point.

 

[avoigt]

Thank you for posting the relevant sections. The OP to which I responded indicated that EM would not get paid anything if he does not grow the company up to 13 fold. This is not correct.

As the sections you referenced note, “If none of the 12 tranches is achieved, Elon will not receive any compensation.” This is not the same statement as, “Elon will not get paid anything if he does not grow the company up to 13 fold.” There is a spectrum of outcomes between the two extremes.

On a separate note, I generally like sarcasm and use it in casual friendly conversations, but it can be harmful if not handled with care in correct settings. You may read about this further here: Think Sarcasm is Funny? Think Again Just my 2c as I had to learn this the hard way...

Allow me to clarify,

I wrote: "It means in a nutshell that Elon will only receive compensation if he grows the company up to 13 fold."

Up to means in that context that EM already can get compensation at earlier levels but he receives only compensation if he grows the company. It does not mean he only receives compensation if he grow the company 13 fold and nothing below.

That is in line with the investor letter IMHO. If it was anyway misleading than apologize on my side.

 

[Reciprocity]

on target to what exactly? this is a genuine question... because at this point I'm totally confused as to what the company's goals are. are you suggesting the goal is 500k in 2020 again and that's acceptable? or are you suggesting 1m in 2020 is still the target that they're "exactly on target" for?

just to be clear, 500k/yr in 2020 makes them 1/4th the size of BMW today. 1m in 2020 makes them 1/2 the size of BMW today. so, how exactly does this company justify massive market cap expansion from here?

Tesla doesn't have to make more cars then BMW to crush BMW. Only about the top 500,000 cars made by BMW have significant margin. A large portion of the 2M cars are mini Coopers and 1,2 series cars. Tesla has already dominated the 6-7 series and M5 cars which are BMWs highest margin cars. Model 3 can fill and compete in the space occupied by the 3-5 series. This is going to be very painful for BMW. No one is buying an i3 over a model 3 and even if they did, BMW didn't make any money from the i3 and can't supply hundreds of thousands of them.

The same effect will fall on all the German automakers making cars in that range. If by some miracle they magically come out with cars in the fanciful year of 2020, the year if the EV apparently. If and it's a big if... They will only cannibalize their own profitable models.

Last. Making a lot of cars is not the problem. Many companies do it, it can be it right purchased including the talent, equipment even shuttered factories like Fremont. What can't be, at least but quickly, is fully automated battery supply and pack assembly. I have no doubt GM or Daimler could make a million EVs in 2020, but battery supply won't allow it and they have invested in batteries. Period. When and if 2020 comes and these magical 109 models start rolling off the lines will have to scrimp and scrape and compete for very limited battery supply. While Tesla will be ramping gf1 to 100+GWh/Y, which is about the amount the entire world produces today, most of which are Chinese batteries for the Chinese market made to Chinese requirements which are not suitable for long range EVs. Most of the project growth on battery supply is China and Tesla, with a tiny fraction being Korea (LG and Samsung). My guess is Tesla will contract the Koreans to make cells for stationary storage and make it even harder for the competition. They have already done that for the Australian power pack install.

 

[mongo]

Thanks for the clarification. I have zero problem with cap raises for the right reasons. Would prefer other forms of funding, but time to market has a tremendous value at this point.

Understood. Twice the shares would means half the value per share. However, if twice the shares means twice the Market cap and other numbers, that is a wash. Hard to imagine needing even one multiple of the current share count ($50+ Billion) in addition to 3 and TE profits. Maybe some raise to get Y, Semi, Roadster going ($10B max?), but after that things should be cash positive. In a few years, the limit may be how large (how many) the infrastructure build out team is.

 

[mongo]

Tesla doesn't have to make more cars then BMW to crush BMW. Only about the top 500,000 cars made by BMW have significant margin. A large portion of the 2M cars are mini Coopers and 1,2 series cars. Tesla has already dominated the 6-7 series and M5 cars which are BMWs highest margin cars. Model 3 can fill and compete in the space occupied by the 3-5 series. This is going to be very painful for BMW. No one is buying an i3 over a model 3 and even if they did, BMW didn't make any money from the i3 and can't supply hundreds of thousands of them.

The same effect will fall on all the German automakers making cars in that range. If by some miracle they magically come out with cars in the fanciful year of 2020, the year if the EV apparently. If and it's a big if... They will only cannibalize their own profitable models.

Last. Making a lot of cars is not the problem. Many companies do it, it can be it right purchased including the talent, equipment even shuttered factories like Fremont. What can't be, at least but quickly, is fully automated battery supply and pack assembly. I have no doubt GM or Daimler could make a million EVs in 2020, but battery supply won't allow it and they have invested in batteries. Period. When and if 2020 comes and these magical 109 models start rolling off the lines will have to scrimp and scrape and compete for very limited battery supply. While Tesla will be ramping gf1 to 100+GWh/Y, which is about the amount the entire world produces today, most of which are Chinese batteries for the Chinese market made to Chinese requirements which are not suitable for long range EVs. Most of the project growth on battery supply is China and Tesla, with a tiny fraction being Korea (LG and Samsung). My guess is Tesla will contract the Koreans to make cells for stationary storage and make it even harder for the competition. They have already done that for the Australian power pack install.

I would add (am adding) the combination of your first and last points. Tesla is (about to be) good at making lots of cars with high (is 30% high?) margins. The moat of efficient internal (no lost mark up) battery pack manufacturing is a huge factor in being able to do that in the world of EVs.

 

[Reciprocity]

Understood. Twice the shares would means half the value per share. However, if twice the shares means twice the Market cap and other numbers, that is a wash. Hard to imagine needing even one multiple of the current share count ($50+ Billion) in addition to 3 and TE profits. Maybe some raise to get Y, Semi, Roadster going ($10B max?), but after that things should be cash positive. In a few years, the limit may be how large (how many) the infrastructure build out team is.

I totally get that and sure that is the hope. My thinking is that if Tesla has the opportunity to simultaneously build 3 megafatctories to built vehicles, solar and batteries I'm the same footprint, that would precipitate a cap raise and I would celebrate. That is an extreme scenario of course, but one can dream.

 

[22522]

Does growing the company through acquisition count?

Suppose they buy VW. Do shareholders win, too?

 

[mongo]

Allow me to clarify,

I wrote: "It means in a nutshell that Elon will only receive compensation if he grows the company up to 13 fold."

Up to means in that context that EM already can get compensation at earlier levels but he receives only compensation if he grows the company. It does not mean he only receives compensation if he grow the company 13 fold and nothing below.

That is in line with the investor letter IMHO. If it was anyway misleading than apologize on my side.

Linguist off topic post:

Pet peeve: sales ads that say "save up to 50% or more", since they just covered every possibility...

That said, "up to" implies to me also that Elon would not get compensation if the multiple was greater than 14.

"They can score up to 13 points, and we'll still win"

If it is being treated as a limit with an upper conditional, it can imply failure of the condition if target not met. Especially with the use of "only" which implies an either/or condition.

"You will only be retained if you get your sales up to the new target"

 

[mongo]

Does growing the company through acquisition count?

Suppose they buy VW. Do shareholders win, too?

No, it that specific case, they lose due to now having dealerships, legacy vehicles/ plants/ people.

Aquisitions would count in general.

 

[ValueAnalyst]

Allow me to clarify,

I wrote: "It means in a nutshell that Elon will only receive compensation if he grows the company up to 13 fold."

Up to means in that context that EM already can get compensation at earlier levels but he receives only compensation if he grows the company. It does not mean he only receives compensation if he grow the company 13 fold and nothing below.

That is in line with the investor letter IMHO. If it was anyway misleading than apologize on my side.

Thank you for the clarification.

Then the question becomes, "Are you okay with handing EM $1B if the company only gets to $100B market cap and stays there?"

Did Tim Cook get 1% of the company when AAPL’s market cap doubled in the last 18 months?

If you say Tim Cook would be benefiting from the moat Steve Jobs built, that is also true here: Future Elon Musk will be benefiting from the moat built by Past Elon Musk, who already got paid with the first comp plan.

 

[Chickenlittle]

Thank you for the clarification.

Then the question becomes, "Are you okay with handing EM $1B if the company only gets to $100B market cap and stays there?"

Did Tim Cook get 1% of the company when AAPL’s market cap doubled in the last 18 months?

If you say Tim Cook would be benefiting from the moat Steve Jobs built, that is also true here: Future Elon Musk will be benefiting from the moat built by Past Elon Musk, who already got paid with the first comp plan.

Since you sold all but 1 share two days ago, your options would include using your 1 share proxy to vote against the package or even sell that last share

 

[ValueAnalyst]

Since you sold all but 1 share two days ago, your options would include using your 1 share proxy to vote against the package or even sell that last share

You may be confusing me with @MitchJi

 

[mongo]

Thank you for the clarification.

Then the question becomes, "Are you okay with handing EM $1B if the company only gets to $100B market cap and stays there?"

Did Tim Cook get 1% of the company when AAPL’s market cap doubled in the last 18 months?

If you say Tim Cook would be benefiting from the moat Steve Jobs built, that is also true here: Future Elon Musk will be benefiting from the moat built by Past Elon Musk, who already got paid with the first comp plan.

If the shares represented by the plan will already be accounted for (Jan 19th lock in). Is not the cost to Tesla of the total bonus only 20.3 million * 350.02 = 7.1 Billion or 592 million per level? If the entire 10 year period is used, the effective pay rate cost is at most 710million a year.
Elon already owns almost double (22% vs 12%) what the plan offers, so this is 'only' a 50% bump in reward vs stock price (dilution impacts him also).

@Chickenlittle The proxy votes are based on ownership on Feb 7th.

 

[ValueAnalyst]

If the shares represented by the plan will already be accounted for (Jan 19th lock in). Is not the cost to Tesla of the total bonus only 20.3 million * 350.02 = 7.1 Billion or 592 million per level? If the entire 10 year period is used, the effective pay rate cost is at most 710million a year.
Elon already owns almost double (22% vs 12%) what the plan offers, so this is 'only' a 50% bump in reward vs stock price (dilution impacts him also).

@Chickenlittle The proxy votes are based on ownership on Feb 7th.

I think that's how accounting looks at it, but I think a more appropriate way of looking at it is giving him 10% of the value of future cash flows.

As many here are already aware, my intrinsic value estimate of the company is much higher than current price, as well as estimates from many here, so it makes sense that I may be the most irritated shareholder by the proposed plan.

 

[NateB]

Thank you for the clarification.

Then the question becomes, "Are you okay with handing EM $1B if the company only gets to $100B market cap and stays there?"

Did Tim Cook get 1% of the company when AAPL’s market cap doubled in the last 18 months?

If you say Tim Cook would be benefiting from the moat Steve Jobs built, that is also true here: Future Elon Musk will be benefiting from the moat built by Past Elon Musk, who already got paid with the first comp plan.

I think that this is a good point. If the market cap reaches $100 billion in 10 years, that is a 70% increase or about 5.5% per year. Adding dilution from stock-based compensation, shareholder returns would be lower than 5% per year. Any stock-based capital raises or acquisitions would further dilute shareholders relative to that $100 billion market cap, which would include the value of the acquisition.

If TSLA earns shareholders 4-5% per year, this is not bad performance, especially depending on how the rest of the market performs during that time. But it is also not clear whether that performance deserves a nearly $100 million per year CEO payout. [Edit: this number should be a bit lower based on Mongo's post]

On the other hand, if my investment goes up by 50-70% in 10 years and then gets diluted by an additional 1% by Elon's stock options, that doesn't really bother me. And if my money goes down, Elon would definitely get nothing, so our interests are still very aligned.

As a shareholder, I care about my bottom line, Tesla's mission, and Elon's commitment to those two much more than I do about how much Elon deserves. I also recognize that it takes high compensation to further motivate a billionaire. So in the end I am still happy with the proposed compensation package. Elon seems to be personally guaranteeing *at least* a 4% annual return (or he doesn't get paid), which to me is excellent for a stock with real potential for much higher growth.

 

[mongo]

I think that's how accounting looks at it, but I think a more appropriate way of looking at it is giving him 10% of the value of future cash flows.

My comment was more to ensure people were on the same page regarding what that 1% was based on (current vs future cost). (1% of 50B vs 100B). As an aside, back projecting instead, the stock used to be $30, so one could say they are paying him 70 million for getting them another 50B in market cap.

By locking in now, he will be negatively impacted by future dilution so, if anything sways him, that should help with future stock holder value.

If TSLA earns shareholders 4-5% per year, this is not bad performance, especially depending on how the rest of the market performs during that time. But it is also not clear whether that performance deserves a nearly $100 million per year CEO payout.

On the other hand, if my investment goes up by 50-70% in 10 years and then gets diluted by an additional 1% by Elon's stock options, that doesn't really bother me. And if my money goes down, Elon would definitely get nothing, so our interests are still very aligned.

Ignoring dilution and starting at 59B: With the 10 year limit on the plan, a rate of 5% would only get Tesla to 96 billion and Elon would not get any bonus.To get to 100B will take a minimum 7% growth. To hit 650B will take an annualized growth rate of 27%.

Edit: 5.5% to hit 100B in 10 years,. Thanks @NateB !

 

[Yggdrasill]

Thank you for the clarification.

Then the question becomes, "Are you okay with handing EM $1B if the company only gets to $100B market cap and stays there?"

Did Tim Cook get 1% of the company when AAPL’s market cap doubled in the last 18 months?

If you say Tim Cook would be benefiting from the moat Steve Jobs built, that is also true here: Future Elon Musk will be benefiting from the moat built by Past Elon Musk, who already got paid with the first comp plan.

He wouldn't get 1 billion.

With Tesla valued at $100B, that would be TSLA at 591, assuming no more dilution. Musk would pay $350/share and would have a profit of $241/share. That's $407M, not $1B.

 

[Starno]

Thank you for the clarification.

Then the question becomes, "Are you okay with handing EM $1B if the company only gets to $100B market cap and stays there?"

Did Tim Cook get 1% of the company when AAPL’s market cap doubled in the last 18 months?

If you say Tim Cook would be benefiting from the moat Steve Jobs built, that is also true here: Future Elon Musk will be benefiting from the moat built by Past Elon Musk, who already got paid with the first comp plan.

I agree, however we also have to consider that he's not only the CEO of Tesla he is also the Founder (ok, not the initial founder., but you get my point).

Look at the Koch Brothers, they own 84% of the company. Warren Buffett owns 36,8 %.
Elon barely owns 27% of the company.