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Tesla Shares Outstanding and Effect of Stock Dilution

Tesla Model S dahsboard. Flickr Image.

Tesla’s shares outstanding has been creeping up steadily over the last few years and hit a record high as of 4Q 2020.

The increases in Tesla’s common stocks may lead to a phenomenon called stock dilution, an effect that reduces the ownership percentage of existing shareholders.

Other than a smaller ownership percentage, stock dilution could also reduce earning per share (EPS) as the number of stocks outstanding has increased.

If Tesla is paying a cash dividend, the dividends per share may decrease due to the increasing number of shares outstanding.

The good news is that equity issuance comes with less risk compared to taking on more debts.

When Tesla issues equity to raise cash, it does not have to repay the capital.

The only downside to stock issuance is that it dilutes the control of the company.

On the other hand, Tesla needs to repay the debt that it borrows, plus the interest charges.

Tesla’s Shares Outstanding As Of 2020 4Q

Tesla’s shares outstanding can be uncovered in the company’s balance sheet under the stockholders’ equity section as shown in the following snapshot:

Tesla stockholders equity - 4Q 2020

Tesla stockholders equity – 4Q 2020

From the snapshot above, Tesla has not issued any preferred shares as of Q4 2020 even though the number of authorized preferred stock is 100 million outstanding.

Theoretically, Tesla can issue up to a maximum of 100 million preferred stocks.

On the other hand, there are over 2 billion common stocks authorized.

Theoretically, Tesla can issue up to a maximum of 2 billion common stocks.

As of 4Q 2020, Tesla has issued up to 960 million common stocks.

This number of stocks outstanding has already taken into account the company’s 5-for-1 stock split which was completed in August 2020.

Tesla’s Shares Outstanding History

Tesla common stocks outstanding

Tesla common stocks outstanding

* Common stocks outstanding has been adjusted for the 5-for-1 stock split and was taken directly from Tesla’s quarterly and annual statements.

The chart above tracks Tesla’s quarterly common stocks or common shares outstanding for the previous 6 years from 2015 to 2020.

Over the chart, the long-term trend shows that Tesla’s outstanding stocks have increased quite significantly in the last 6 years, with the latest number reaching a record high at 960 million shares in Q4 2020.

To find out why Tesla’s common stock outstanding has increased at such a dramatic rate, we will look at the quarterly growth rates for shares outstanding and the respective events that occurred in that particular quarter.

Tesla’s Stocks Outstanding Quarterly Growth Rates

Tesla outstanding stocks growth rates

Tesla outstanding stocks growth rates

* Author’s own calculation.

The chart above tracks the quarterly growth rates of Tesla’s shares outstanding for the period from 2015 to 2020.

At the chart, there are quite a few large spikes between 2015 and 2020.

For example, the most significant one occurred in Q2 2016 when stocks outstanding increased by more than 10% from the prior quarter.

Similarly, share outstanding increased by close to 8% in 4Q 2016 from the prior quarter.

There were quite a few share outstanding increments throughout 2020.

The most recent one was in 4Q 2020 when shares outstanding increased by 1.3%.

While some numbers are small and below 1%, they are still positive numbers, indicating that stocks outstanding have grown, and it seems to me that there is no end in sight yet.

Tesla’s Common Stocks Issuance in Public Offerings

The stock outstanding growth rates that you saw in the previous discussion have been a result of Tesla’s common stock issuance during a public offering.

The purpose of stock issuance is to raise cash from the capital market.

Tesla can raise cash through a number of means, and the easiest one is through common stock issuance.

All told, the following paragraphs detail some of Tesla’s stock issuance events.

Stocks Issuance in 3Q 2015

In August 2015, Tesla issued 3 million common stocks to raise $738 million.

This stock issuance had caused the common stocks outstanding to grow by 3% from 2Q 2015 to 3Q 2015.

Stocks Issuance in 2Q 2016

This was a large jump in share count by more than 10% in 2Q 2016.

The outstanding shares grew from 134 million in 1Q 2016 to 148 million in 2Q 2016.

As many as 14 million shares were added in just a single quarter.

In May 2016, Tesla issued about 8 million common stocks to the public at $215 per share (before adjusted for split) to raise $1.7 billion of cash.

During the same quarter, the remaining share growth was a result of common stocks given to employees as part of the company equity incentive plans.

The equity incentive plan provides for the granting of stock options, restricted stock units (RSU), and stock purchase rights to the company employees, directors and consultants.

Stocks Issuance in 4Q 2016

In 4Q 2016, Tesla’s common stocks outstanding increased from 150 million to 162 million in 4Q 2016, an 8% growth from quarter to quarter.

The increase was mainly a result of Tesla’s acquisition of SolarCity.

In 4Q 2016, Tesla issued 11 million common stocks at $185 per share (before adjusted for split) to buy SolarCity. The deal was valued at $2.15 billion.

Stocks Issuance in 2Q 2019

In May 2019, Tesla issued 3.5 million common stocks to raise $850 million.

In the same quarter, Tesla also issued about 900k of common stocks for an aggregate value of $207 million to acquire Maxwell Technologies, Inc.

The combination of stock issuance and acquisition had caused the common stocks outstanding to grow by nearly 4% in 2Q 2019.

Stocks Issuance in 1Q 2020

In this quarter, Tesla issued more than 3 million common stocks at $767 per share (before adjusted for split) to raise $2.31 billion of cash.

Stocks Issuance in 4Q 2020

In this quarter, Tesla issued more than 8 million common stocks to raise $5 billion of cash.

Tesla’s Stock-Based Compensation

Tesla stock-based compensation expenses

Tesla stock-based compensation expenses

* Stock-based compensation expense numbers were taken directly from Tesla’s quarterly and annual statements.

Tesla’s common stocks outstanding can also increase as a result of the company’s equity incentive awards.

In the equity incentive award, Tesla issues stocks to regular employees, contractors, directors and its CEO – Elon Musk in exchange for their services.

When Tesla issues common stocks, the company will incur an expense known as stock-based compensation expense.

Stock-based compensation expense is reflected in the income statement and is a charge against revenue.

In other words, stock-based compensation expense will reduce Tesla’s profitability or net income.

While stock-based compensation is an expense, it’s a non-cash expense, meaning that it does not affect Tesla’s cash flow from operating activities.

Coming back to the chart above, Tesla’s stock-based compensation has increased substantially in the last 6 years, with 2020 having the most growth in this expense.

As of 2020 Q4, Tesla’s stock-based compensation expense reached an astounding figure of $633 million in the fourth quarter alone.

The increasing expense of Tesla’s stock-based compensation has been a result of the increasing practices of stock issuance to the company’s employees, contractors, directors and its CEO.

In the end, Tesla’s common share outstanding will be affected and it will be increasing as a result of the continuous stock issuance.

Growth of Tesla’s Share Outstanding Attributed to Convertible Debts

Aside from equity incentive awards and capital raise through equity issuance, another way that also can lead to higher Tesla’s outstanding common stocks is the exercise of the conversion feature of convertible debt.

For your information, Tesla holds a number of convertible debts as of 2020 4Q, according to this article – Tesla’s securities.

As the name implies, convertible debts are available for conversion by their holders to common stocks when Tesla’s stock closing price exceeds an applicable conversion price of the debts.

To simplify things, when Tesla’s stock price hit a certain threshold, say $500 per share, for a number of days in a quarter, the holders have the option to exchange a portion of or even the whole debt for common stocks.

In this case, Tesla will pay cash to settle the principal amount and issue common stocks for the conversion premium.

These common stocks issued will certainly increase the outstanding stocks.

The question is, how many outstanding stocks have been added?

According to the following snapshot that depicts Tesla’s statements of equity, about 2 million shares outstanding or less than 1% of total shares outstanding attributed to convertible debts have been added in 2020.

Tesla outstanding stocks growth attributed to convertible securities

Tesla outstanding stocks growth attributed to convertible securities

The 2 million shares outstanding added seems like a small number.

Yes, the effect of the convertible securities on Tesla’s shares outstanding may look like nothing.

However, when you add up all the things that had fueled the growth of Tesla’s shares outstanding, the effect has been devastating.

Effects of A Growing Stocks Outstanding

As mentioned, the effect is stock dilution.

What is stock dilution?

Here is an example.

Tesla has 100 shares outstanding, and you own 50 of them.

That means your ownership of Tesla is 50% of the company.

Later, Tesla launches a public offering and issues 100 more shares.

So, the total shares outstanding now have become 200.

You still own the 50 shares, but the percentage of your ownership of Tesla has now become only 25%.

In short, you owned half of the company in the first place.

Due to the increase in shares outstanding, you own only a quarter of the company now.

Summary

Between 2015 and 2020, Tesla’s common stock outstanding has increased quite dramatically, and the effect is stock dilution for existing stockholders.

Tesla issued more stocks to raise cash, and this practice has fueled the growth in shares outstanding.

Additionally, Tesla also issued stocks to employees, contractors, directors and CEO as part of the company’s equity incentive awards.

However, this practice also led to the increase in shares outstanding.

Following the stock issuance, Tesla’s stock-based compensation expense has exploded and reached $633 million in the 4th quarter of 2020 alone.

Keep in mind that the stock-based compensation expense will reduce the net income and thereby, the earnings per share or EPS.

Tesla’s convertible securities also fueled in part the growth of the company’s share outstanding, albeit at a very small amount.

References and Credits

1. All financial figures in this article were obtained and referenced from Tesla’s quarterly and annual statements available at: Tesla Investor Relations.

2. Featured image was used under Creative Common Licenses and obtained from e-connected and Sandman Design.

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