Management Stock Options and other nonsense from Doug Kass

[aznt1217]

So here is the "hole" Doug Kass found. If I didn't understand the whole reason for why Tesla exists and why it was founded, I'd be worried. Let's discuss

Tesla Takes Shareholders for a Ride
Originally published on Thursday, May 8, at 2:15 p.m. EDT.

Tesla's management received a multibillion-dollar transfer of wealth from the common shareholders.
Yesterday as we all know, Tesla Motors released its first-quarter 2014 earnings report, and, based on my analysis, there was less than meets the eye.

But even more egregious (by a factor of let's say 400x!) was a line item in the Tesla's 2013 annual report regarding the company's issuance of stock options.

We all recall several months ago that my friend/buddy/pal David Winters began a public quarrel with Coca-Cola's management.

David felt that there was an excessive transfer of wealth to management via a too-generous option program.

Based on my analysis below, I suspect that Tesla's Elon Musk was not listening carefully to either David Winters or Warren Buffett.

Buried deep within Tesla's 2013 Form 10-K, it was revealed that the difference between the value of the options issued and the market price (intrinsic value of the options) rose from $317 million to over $2.8 billion last year.

In other words, Tesla's management has received a multibillion-dollar transfer of wealth from the common shareholders.

The difference of nearly $2.5 billion (the benefit accrued by virtue of the price appreciation in Tesla's shares last year) obviously dwarfs Tesla's balance sheet and has entirely been ignored by the analyst community.

I reshorted Tesla on the rally at midday.
At the time of publication, Kass was short TSLA.

 

[dmunjal]

So here is the "hole" Doug Kass found. If I didn't understand the whole reason for why Tesla exists and why it was founded, I'd be worried. Let's discuss

Tesla Takes Shareholders for a Ride
Originally published on Thursday, May 8, at 2:15 p.m. EDT.

Tesla's management received a multibillion-dollar transfer of wealth from the common shareholders.
Yesterday as we all know, Tesla Motors released its first-quarter 2014 earnings report, and, based on my analysis, there was less than meets the eye.

But even more egregious (by a factor of let's say 400x!) was a line item in the Tesla's 2013 annual report regarding the company's issuance of stock options.

We all recall several months ago that my friend/buddy/pal David Winters began a public quarrel with Coca-Cola's management.

David felt that there was an excessive transfer of wealth to management via a too-generous option program.

Based on my analysis below, I suspect that Tesla's Elon Musk was not listening carefully to either David Winters or Warren Buffett.

Buried deep within Tesla's 2013 Form 10-K, it was revealed that the difference between the value of the options issued and the market price (intrinsic value of the options) rose from $317 million to over $2.8 billion last year.

In other words, Tesla's management has received a multibillion-dollar transfer of wealth from the common shareholders.

The difference of nearly $2.5 billion (the benefit accrued by virtue of the price appreciation in Tesla's shares last year) obviously dwarfs Tesla's balance sheet and has entirely been ignored by the analyst community.

I reshorted Tesla on the rally at midday.
At the time of publication, Kass was short TSLA.

Every tech company does this. Doesn't make it right but it's not unique to Tesla.

This is the way Silicon Valley attracts the best and brightest. Wall Street always hated this model but it works to create great innovation.

Though some companies abuse it.

Cisco Systems: The greatest stock-laundering machine ever invented

I don't think Tesla is doing this.

 

[aznt1217]

More importantly, this helps Tesla even more because it's backed up by all of Elon's assets (buy back plan). That and this company
Is very different from others.

 

[NigelM]

Every tech company does this. Doesn't make it right but it's not unique to Tesla.

Not only tech companies. At risk of going OT let me give some perspective from the company side (I've run a number of companies and been a recipient of stock option plans as well as using them to incentivize and retain staff):

• Option plans are a great way to keep salary costs pegged. Particularly useful in start-up situations but also useful to retain staff with unique abilities/talents/knowledge. Yup, that sounds a lot like Tesla folk.
• The recipient takes a big risk (I've had options underwater before) but sticks with the company throughout business cycles. Volatile stock anyone? It's fair they should share in the rewards.
• In Tesla's case the shares basically rocketed last year; that wasn't known in advance, nor was it a given, it was maybe dreamed of by management but could not have been planned for.

As a TSLA shareholder I don't have a problem with stock option incentives in this case. Look at the reaction last year (IIRC) when a couple of folks left the company and the markets got jittery.

 

[Ugliest1]

I was under the impression that the management stock options don't actually take effect for many (several?) years and require specific goals to be attained. Which is a great way I think to compensate bright people while giving them a large incentive to stay with the program, so to speak. But maybe I didn't read enough?

 

[SteveG3]

So here is the "hole" Doug Kass found. If I didn't understand the whole reason for why Tesla exists and why it was founded, I'd be worried. Let's discuss

Tesla Takes Shareholders for a Ride
Originally published on Thursday, May 8, at 2:15 p.m. EDT.

Tesla's management received a multibillion-dollar transfer of wealth from the common shareholders.
Yesterday as we all know, Tesla Motors released its first-quarter 2014 earnings report, and, based on my analysis, there was less than meets the eye.

But even more egregious (by a factor of let's say 400x!) was a line item in the Tesla's 2013 annual report regarding the company's issuance of stock options.

We all recall several months ago that my friend/buddy/pal David Winters began a public quarrel with Coca-Cola's management.

David felt that there was an excessive transfer of wealth to management via a too-generous option program.

Based on my analysis below, I suspect that Tesla's Elon Musk was not listening carefully to either David Winters or Warren Buffett.

Buried deep within Tesla's 2013 Form 10-K, it was revealed that the difference between the value of the options issued and the market price (intrinsic value of the options) rose from $317 million to over $2.8 billion last year.

In other words, Tesla's management has received a multibillion-dollar transfer of wealth from the common shareholders.

The difference of nearly $2.5 billion (the benefit accrued by virtue of the price appreciation in Tesla's shares last year) obviously dwarfs Tesla's balance sheet and has entirely been ignored by the analyst community.

I reshorted Tesla on the rally at midday.
At the time of publication, Kass was short TSLA.

it does not seem accurate to describe this as a transfer of wealth from shareholders to Tesla management.

Presumably, the options that appreciated $2.5 billion were issued when the stock was trading around $25. let's say it was a 15 million share option program. initially, about $400 million was set aside as compensation for management through the program, and with the stock's run, on paper the options are up about $2.5 billion. I have no problem with that. now, when this option program runs out, I would have a problem if another 15 million share program was put into place worth $2.5 billion. another program worth about $400 million reflecting fewer shares in the options (actually more in proportion to the growth of the management team since the last program), I have no problem with.

fwiw, I heard a Bloomberg radio interview with Kass where he compared Elon to a couple of other figures. I honestly don't remember if one was PT Barnum, but that was basically the tone of the comparisons. I don't take anything Kass says seriously.

just found the interview, it was PT Barnum Kass compared Musk to... actually a combination of PT Barnum and a character from the musical Chicago who sings "Give them the old razzle dazzle" (5:40 into the link)

http://media.bloomberg.com/bb/avfile/vTxIA5tEv1xM.mp3

 

[AlMc]

it does not seem accurate to describe this as a transfer of wealth from shareholders to Tesla management.

Presumably, the options that appreciated $2.5 billion were issued when the stock was trading around $25. let's say it was a 15 million share option program. initially, about $400 million was set aside as compensation for management through the program, and with the stock's run, on paper the options are up about $2.5 billion. I have no problem with that. now, when this option program runs out, I would have a problem if another 15 million share program was put into place worth $2.5 billion. another program worth about $400 million reflecting fewer shares in the options (actually more in proportion to the growth of the management team since the last program), I have no problem with.

fwiw, I heard a Bloomberg radio interview with Kass where he compared Elon to a couple of other figures. I honestly don't remember if one was PT Barnum, but that was basically the tone of the comparisons. I don't take anything Kass says seriously.

Even if it was PT Barnum, Barnum sold a 'show'. He never made anything of real value. Musk/TM make a vehicle that almost every independent tester (including the government) has found to be the 'best' and 'safest'. Poor comparison if kass uses this.

 

[Johan]

Kass' analysis is kind of strange. The whole reason the option program "cost" has skyrocketed is that the stock has. I bought in at an average of $37... So would I rather the stock sit at $50 today so this did not occur? Don't think so. Those who bought in at $265 did so willingly, options program was full disclosure, and still the same percentage of the market cap as before.

 

[SteveG3]

Even if it was PT Barnum, Barnum sold a 'show'. He never made anything of real value. Musk/TM make a vehicle that almost every independent tester (including the government) has found to be the 'best' and 'safest'. Poor comparison if kass uses this.

of course AIMc, it is a ridiculous and inflammatory comment by Kass. That's why I wrote that I don't take anything Kass says seriously. Kass sounds intelligent, but he is short the stock, and apparently willing to say anything to help his position.

sounds like a perfect example of what Jim Cramer was talking about here (if you don't have time to listen, a quick synopsis, "step 1: Short, step 2: lie, lie, lie"):

Cramer Manipulation - YouTube

 

[30seconds]

Kass' analysis is kind of strange. The whole reason the option program "cost" has skyrocketed is that the stock has. I bought in at an average of $37... So would I rather the stock sit at $50 today so this did not occur? Don't think so. Those who bought in at $265 did so willingly, options program was full disclosure, and still the same percentage of the market cap as before.

I think his analysis is very consistent. As far as I can tell he 1. Has decided that the company is overvalued & is a good short and 2. twists the facts to support point #1

The facts that these options were granted before the run up and are consistent with just about every other public company do not fit point #1 so they are left out.

Hack Extraordinaire.

 

[Johan]

sounds like a perfect example of what Jim Cramer was talking about here (if you don't have time to listen, a quick synopsis, "step 1: Short, step 2: lie, lie, lie"):

Cramer Manipulation - YouTube

Thank you for this video! Great, I never knew Cramer had an honest bone in there somewhere
But to be honest to Cramer it could just might have been 1. Go long 2. lie, lie, lie.
On second though though, it is probably more likely for people trying to msnipulate the market to go short rather than long, for various reasons, at least in a bull market.

 

[The Blue Owl]

There was no transfer from shareholders to insiders. There was, however, an epic transfer from stock shorters to stock holders, insiders included. Of course Kaas is gonna whine.

 

[aznt1217]

it does not seem accurate to describe this as a transfer of wealth from shareholders to Tesla management.

Presumably, the options that appreciated $2.5 billion were issued when the stock was trading around $25. let's say it was a 15 million share option program. initially, about $400 million was set aside as compensation for management through the program, and with the stock's run, on paper the options are up about $2.5 billion. I have no problem with that. now, when this option program runs out, I would have a problem if another 15 million share program was put into place worth $2.5 billion. another program worth about $400 million reflecting fewer shares in the options (actually more in proportion to the growth of the management team since the last program), I have no problem with.

fwiw, I heard a Bloomberg radio interview with Kass where he compared Elon to a couple of other figures. I honestly don't remember if one was PT Barnum, but that was basically the tone of the comparisons. I don't take anything Kass says seriously.

just found the interview, it was PT Barnum Kass compared Musk to... actually a combination of PT Barnum and a character from the musical Chicago who sings "Give them the old razzle dazzle" (5:40 into the link)

http://media.bloomberg.com/bb/avfile/vTxIA5tEv1xM.mp3

Oh thanks for this recording. It's nice to hear him speak. He's straight up technical and figures. Which is good because it works for him--at times, but in the grand scheme of things he really doesn't understand the business. When he talked about the Gigafactory... definitely doesn't get it. When he started making comparisons with Toyota, GM, and VW it was straight up on market cap figures. Typical Wall Street folk that gives it a bad name. I also think he has a personal chip on his shoulder because he's disputing straight up fact on Elon's accomplishment. Even people that dislike him credit him with his business successes. Maybe it's because Elon is worth more than he is?

With Tesla's current situation, I liken it to the times in the 70's when the American Auto business was buzzing. Then came in the Japanese ahead of the curve and gave people what they WOULD WANT and look where we are now. I would use the Apple example, but people seem to keep striking it down (understandable because it's an entirely different product, but same strategy). I think Tesla is basically in the same boat except it's fighting the entire industry of entrenched giants so there's significantly more perception and forces to fight.

 

[green1]

I would use the Apple example, but people seem to keep striking it down (understandable because it's an entirely different product, but same strategy).

The reason people keep striking it down is that there is not even a small similarity. Apple took an existing product, copied it, jacked up the price and marketed the heck out of it. They never invented a thing, and the only thing they did well is advertise.
Tesla on the other hand is at the forefront of innovation, and haven't spent a penny on marketing.

Quit comparing Tesla to Apple, Tesla is far better than that.

 

[SteveG3]

Thank you for this video! Great, I never knew Cramer had an honest bone in there somewhere
But to be honest to Cramer it could just might have been 1. Go long 2. lie, lie, lie.
On second though though, it is probably more likely for people trying to msnipulate the market to go short rather than long, for various reasons, at least in a bull market.

glad you enjoyed it. familail rhino shared it a couple of days ago, it really impacted me, and I thought it worth repeating.

 

[aznt1217]

The reason people keep striking it down is that there is not even a small similarity. Apple took an existing product, copied it, jacked up the price and marketed the heck out of it. They never invented a thing, and the only thing they did well is advertise.
Tesla on the other hand is at the forefront of innovation, and haven't spent a penny on marketing.

Quit comparing Tesla to Apple, Tesla is far better than that.

That's not entirely true at all. The electric car was invented prior to Tesla's existence, but they made it compelling saw something that wasn't like and fixed it. MP3 Players before the iPod were crap and the best "smart phone" prior to the iPhone was a T-Mobile Sidekick/Palm Treos (arguably). I don't remember seeing that much advertising for the iPhone 1, but even then-- the goal was to make it a mass market product. I do agree Tesla is on the forefront of innovation though, but the Model S isn't a mass market product (it's phase 2) -- so no advertising needed yet. Aside from that the comparison to Tesla stock and Apple stock is actually a pretty good comparison conceptually and one that all of us should hope for in the event the overall market gets pummeled. There's solid management, a great product, and a passionate fan base that will defend it vehemently. Some of this is my opinion, but there's really little to debate in terms of Apple product execution, success, and share price evolution since the release of the iPod.

Also the point is, back when Apple was "super hot" for consumers, it wasn't for Wall Street. That's where we are today with Tesla.

Thanks to Mods for making this a separate thread.

 

[techmaven]

The reason people keep striking it down is that there is not even a small similarity. Apple took an existing product, copied it, jacked up the price and marketed the heck out of it. They never invented a thing, and the only thing they did well is advertise.
Tesla on the other hand is at the forefront of innovation, and haven't spent a penny on marketing.

Quit comparing Tesla to Apple, Tesla is far better than that.

Whoa. I would hate to get into a flame fest with this, but this comment is really out there.

Tesla has taken technologies invented by other people, refined them, combined them, and took the pains to create a very compelling and innovative product. That is very similar to Apple. Apple does to invention, but they are best at innovation which is not the same thing. Look at the original mice or the Xerox Star and the evolution of those early inventions that were then refined on multiple levels through a huge number of cycles, in some cases the original is merely a first idea compared to the final product. The GM EV1 is truly a direct precursor to the Tesla Roadster and the Model S clearly derives from both of those and takes it to another series of levels. That is extremely similar to what Apple has done with many products over decades. Many of their products did not achieve their noted status through advertising. Apple's advertising budget was abysmal for a very long time.

 

[green1]

The difference is that apple's products have never been the best out there, there were better mp3 players before the ipod, (and after) there were better cell phones before the iphone, and there are much better ones since. They are marketing geniuses, but their technology is nothing special. Tesla is the exact opposite, they are on the cutting edge of technology, and their product sells itself, it had to, Tesla doesn't advertise.

 

[NigelM]

If you guys want to keep discussing Apple vs Tesla let me know because it's way off topic here. Thanks.

 

[schonelucht]

While the stock options are a non issue, what is a little bit more concerning is that lately most insiders are selling. For some the reason may be to cover their tax but others are left with little enough shares that it is also pure profit taking. Nothing wrong with that but they don't seem to believe an immediate breakout above $200 is likely.