Elon Musk Owns 28% of Tesla, a Stake Worth Nearly $350 Billion. Here's Why His Ownership Level Matters for Shareholders.
Key Points
Tesla shares and Elon Musk’s influence are, not surprisingly, joined at the hip.
His 28.4% stake in his company signals confidence and skin in the game.
But there are some potential drawbacks to such a high percentage of Tesla shares residing in one pair of hands.
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Some companies are synonymous with their founders or high-ranking executives. Elon Musk's Tesla (NASDAQ: TSLA) definitely fits that bill. The data confirm as much.
It could be said that investing in Tesla is synonymous with investing in Musk. Likewise, Musk could be said to be investing in Tesla. The CEO of the electric vehicle (EV) behemoth owns 28.4% of the company's shares, a stake valued at nearly $391.8 billion. Putting Musk's stake into context, it's more than double the combined ownership of Vanguard and BlackRock. The two largest institutional owners of Tesla stock own just over 13% of the shares combined.
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Effectively, any investor, including the do-it-yourself crowd, who is long on Tesla is making a de facto bet on Musk. It's a wager that has its pros and cons.
Elon Musk's massive stake in Tesla is well known and it has pros and cons. Image source: Getty Images.
Consider the risks
Whether it's Tesla or another company where a massive chunk of the shares is controlled by a single person (or a small group of people), there are potential risks to consider.
Musk previously said he wants to control at least a quarter of the company to make the investments needed to turn it into an artificial intelligence (AI) and robotics company. In the past, he's said that if that desire isn't satisfied, he'll focus on AI ventures outside of Tesla's scope. For now, it appears that particular risk has been diminished because the company is forging ahead with Optimus production at one of its California facilities.
Two more risks investors can't ignore: key person risk and board independence. Obviously, Musk is the key person. Various studies confirm that when CEOs fall ill (or worse), their companies' shares often decline. An example of that ominous trend and one that's relevant in the Musk/Tesla equation is the drop in Apple shares when Steve Jobs revealed his cancer diagnosis.
Regarding board independence, when a single shareholder, particularly one who actually runs the company, holds sway as Musk does at Tesla, some critics believe the board will act at that investor's whims, forsaking true independence in the process.
Additionally, companies with highly concentrated share ownership may not be appealing acquisition targets. To be fair, the pool of credible buyers for Tesla with a market capitalization of $1.4 trillion is shallow and likely confined to Musk's other public company, Space Exploration Technologies.
Benefits, too
Musk's 28.4% stake in Tesla isn't solely a cause for concern among investors. There are potential perks, too. At a minimum, he's clearly signaling faith in his abilities and the company's long-term trajectory, meaning his objectives align with the BlackRocks and Vanguards of the world, as well as with the small investor who owns just five, 10, or 20 Tesla shares.
Musk doesn't take a cash salary from Tesla. All of his compensation is equity-based, meaning he's incentivized to make the moves needed to push Tesla shares higher.
A CEO owning as much stock in the company as Musk does in Tesla is rare. Still, investors may want to consider an old Harvard study indicating that members of the Russell 3000 index with what was considered high levels of CEO equity ownership delivered total shareholder returns in excess of those of counterparts whose bosses owned lower percentages of company stock.
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Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, BlackRock, and Tesla. The Motley Fool has a disclosure policy.
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