One of the famous investors portrayed in "The Big Short" is now taking aim at Tesla's stock valuation, noting in a new article that its stock is "ridiculously overvalued."
What's happening?
According to Electrek, Michael Burry blamed the "tragic algebra" of stock-based compensation, namely how it obscures tech companies' real costs when calculating stock values.
Burry was one of the few on Wall Street to correctly predict the 2008 subprime mortgage crisis and has since become a financial thought leader on the advent of AI. His criticism of Tesla spans years, notably holding a massive short position (explained here by Investopedia) against Musk's automaker in 2021.
With this particular critique, Burry argued that Wall Street's treatment of SBCs as non-cash expenses when calculating earnings permanently dilutes existing shareholders. He asserts through a formula he and an associate developed that Tesla dilutes its shareholders by roughly 3.6% each year with no buybacks.
Why is Burry's concern about inflated stock value important?
What Burry highlighted with this concern was how stock-based compensation's omission from expenses makes Tesla's profitability look more impressive than it actually is.
Since employee compensation via stock options isn't considered an expense, the value created with increased profitability goes back to employees and management via new stocks, rather than allowing current equity holders to retain it. This issue could eventually trickle down to the consumer if the market catches on, meaning that Tesla EV prices would increase and make them less accessible to the average car buyer, making it that much harder for Americans to switch to EVs and cut back on air pollution. Fortunately, there are alternatives.
As the EV automaker sorts out Elon Musk's pay package in court, as well, Burry explained the outcome of those proceedings could dilute shares even further.
What's being done about diluted Tesla shares?
While a judge has rescinded Musk's original, approximately $55 billion package, Delaware's Supreme Court will now have to decide if that ruling stands. However, Tesla shareholders have already approved a new stock option package worth up to $1 trillion, which Burry argues would create a massive overhang on the existing inflated value.
"With recent news of Elon Musk's $1 trillion pay package, dilution is certain to continue," Burry said. "Tesla's market capitalization is ridiculously overvalued today and has been for a good long time."
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