Tesla shares outstanding has been increasing over the years. The increases in common stocks may lead to stock dilution which will cut down the ownership of existing shareholders. Other than getting a smaller percentage of the ownership of the company, stock dilution could also lead to the decline of earning per share (EPS).
Before going further into the stock or equity dilution issue, let’s find out what has been causing the increases in Tesla shares outstanding.
Tesla shares outstanding lies within the balance sheet stockholders’ equity section as shown in the following snapshot:
From the snapshot above, Tesla has not issued any preferred shares as of Q3 2019. Although Tesla has not issued any preferred stock, the number of authorized preferred stock is 100 million. Theoretically, Tesla can issue up to a maximum of 100 million preferred stocks. As of Q3 2019, Tesla has not issued any preferred stocks.
On the other hand, there are 2 billion common stocks authorized. Theoretically, the company can issue up to the maximum of 2 billion common stocks. As of 3Q 2019, Tesla has issued up to 180 million common stocks.
Chart of Tesla Shares Outstanding
The chat above tracks Tesla common stocks or common shares outstanding for the previous 5 years from 2015 to 2019.
The trend of the plot shows that outstanding stocks have increased quite significantly over the period.
For example, Tesla outstanding common stocks was only 126 million in Q1 2015 but the number has increased to a record high of 180 million as of Q3 2019. The growth rate in shares outstanding is roughly 45% over the 5-year period. On average, the growth rate is about 9% per annum.
What exactly is causing Tesla common stock outstanding to increase at such a huge rate? To find out, we will analyze some major spikes in stock count in the following chart.
Tesla Common Stock Outstanding Quarterly Growth Rate
The chat above tracks Tesla shares outstanding quarterly growth rate expressed in % for the past 5 years from 2015 to 2019.
From the chart, we can see that there are a few huge spikes that occurred during the shown period. For example, the most significant one occurred in Q2 2016 when stocks outstanding has increased by more than 10% from the prior quarter.
Besides, the one occurred in 4Q 2016 was also quite significant when share count increased by close to 8% from the prior quarter.
Other than a few of these large growth in share outstanding, the rest of the growth rate were quite insignificant and they were mostly less than 2%.
Although there were only a few large increments in stocks outstanding as shown in the chart, Tesla shares outstanding growth rate has been mostly positive throughout the entire period from 2015 to 2019. The all-positive growth rates show that the company has increased its share count in every single quarter, albeit by a very small percentage in some quarters.
The following paragraphs illustrate in detailed what exactly happened when a large bump in stock count occurred.
Stocks Issuance in 2Q 2016
There was a large jump in share count by more than 10% in 2Q 2016. Furthermore, this was the largest increment in share outstanding among the shown quarters in the chart above.
The outstanding shares increased from 134 million in 1Q 2016 to 148 million in 2Q 2016. The growth in share count was quite significant when 14 million outstanding shares was added from one quarter to another.
According to the 2Q 2016 quarterly filing, the root cause of the growth in stocks was primarily due to Tesla capital raise by offering common stocks. In May 2016, Tesla issued about 8 million common stocks to the public at $215 per share to raise $1.7 billion of cash.
During the same quarter, the rest of the outstanding share growth was due to common stocks issued 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
The second largest jump in stocks outstanding occurred in 4Q 2016 based on the chart above. The percentage of growth was around 8% from the prior quarter. During this period, the common stocks outstanding increased from 150 million in 3Q 2016 to 162 million in 4Q 2016.
Based on the company 4Q 2016 quarterly report, Tesla added 12 million more shares mainly because of the acquisition of SolarCity. In 4Q 2016, Tesla completed the takeover transaction when the company issued 11 million common stocks at $185 per share to buy SolarCity. The deal was valued at $2.15 billion.
Stocks Issuance in 2Q 2019
The third largest stocks outstanding increase occurred 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 the above stock issuance had caused the common stocks outstanding to increase by nearly 4% from 1Q 2019 to 2Q 2019.
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 increase by 3% from 2Q 2015 to 3Q 2015.
Tesla Stock Based Compensation
Other than common stock issuance for capital raise and acquisition, Tesla also has been granting stocks to employees as part of its employees reward program which is known as Equity Incentive Plans.
Here is a snapshot extracted from the Q3 2019 quarterly filing that shows Tesla disclosure of the company stock based compensation expenses:
The following chart shows Tesla quarterly stock based compensation expenses for the past 5 years from 2015 to 2019.
Similar to common stock issuance for capital raise and acquisition, stock based compensation is a type of stock issuance. The difference is that common stocks are issued exclusively to Tesla employees in stock based compensation and the expenses from the stock issuance are born by the company instead of by external equity subscribers.
In capital raise, common stocks issued are being purchased by equity subscribers. But in stock based compensation, Tesla would be the “buyer” of the common stocks issued. The cost of purchasing the stocks would be in the form of operating costs recorded under the company income statement.
As a result, stock based compensation is a non-cash transaction, meaning that when Tesla issues stocks to its employees, the transaction does not take cash out of the company. Instead, the transaction reduces the company equity value through operating expenses.
One thing in common among stock based compensation and stock issuance for capital raise is that both of them can cause stock dilution because more stocks are being issued. But stock based compensation is having more severe effect since Tesla is using its own money to “purchase” the stocks issued to employees. In contrast, Tesla is getting cash when offering stocks to external equity subscribers.
As you can see in the chart above, Tesla stock based compensation has increased significantly over the 5 year period and has hit the $200 million threshold in recent quarters. In 2Q 2019 alone, Tesla has issued about 1 million of common stocks as part of its stock based compensation program.
The Never-Ending Growth of Tesla Shares Outstanding
Based on the previous analysis, the root cause of the growth of Tesla shares outstanding has been merely boiled down to the following two reasons:
- The first and main root cause goes to stocks issuance for capital raise and acquisition. This has been the main cause of stocks outstanding growth that we have seen based on all the previous chart analysis and it has been causing millions of common stocks being issued every year.
- The second root cause to stocks outstanding growth has been the stock based compensation program in which Tesla has been granting stocks to its employees every single quarter to reward its employee. In recent quarters, stocks issued to employees has been getting larger and has reached 1 million shares in the latest quarter of 3Q 2019 as shown in the following snapshot.
The following snapshot extracted from Tesla Q3 2019 quarterly filing shows 1 million commons stock issued as part of its stock based compensation expenses.
In short, both stock issuance for capital and stock based compensation program have been the culprits that has caused Tesla stocks outstanding growth all these years.
Effects of Increasing Tesla Stocks Outstanding
With shares outstanding increases every quarter, what would be the effect?
Well, the obvious impact would be on shareholders because their existing shares are getting less valuable when new shares are added every quarter. What does that mean when shares are getting less valuable?
Let’s look at the shareholders’ equity or book value of the company. The shareholders’ equity or book value is the net worth of the company. It’s the difference between total assets and total liabilities. Remember the equation below?
Asset = Liabilities + Shareholders’ Equity
Rewriting the equation:
Shareholders’ Equity (book value) = Asset – Liabilities
Coming back to the stocks outstanding issue. When stock count increases, shareholders’ equity or book value per share will be getting less. Here is the equation of shareholders’ equity per share:
Shareholders’ equity per share = shareholders’ equity / number of shares outstanding
From the equation above, shareholders’ equity per share will be getting less if the nominator (shareholder equity) does not increase while the denominator (share count) increases. In other words, existing shares are diluted when new shares are added.
Stocks dilution means that shareholders ownership of the company has been reduced, as is the case when shareholders’ equity per share or net worth per share of the company has been reduced when shares outstanding increases as seen from the equation above.
Let’s look at how Tesla shareholders’ equity has been performing over the years. Here is a chart that shows Tesla stockholders’ equity.
Chart of Tesla Quarterly Stockholders’ Equity
The chart above shows that Tesla shareholders’ equity has been increasing for the previous 5 years from 2015 to 2019.
In 1Q 2015, Tesla shareholders’ equity was only $1 billion but the value has increased to more than $6 billion in 3Q 2019.
With the analysis above, it looks like the net worth or book value of the company has increased quite significantly over the previous 5 years. Let’s find out what caused the increase in shareholders’ equity.
There are only two things that could add value to the equity: (1)owner contributed capital and (2)company retain earnings.
In general, Tesla has not been consistently profitable as seen from this post: Tesla profit vs revenue. As a result, company retain earnings have been negative as shown in the stockholders’ equity section within the balance sheet (snapshot below). Therefore, company retained earnings should not be the factor that has caused the increases in stockholders’ equity.
On the other hand, owner contributed capital should only be the factor that contributes to the increment of the company equity. Common stocks issuance is a form of owner contributed capital. As discussed in previous paragraphs, we have seen that Tesla has been issuing stocks to raise capital. Therefore, stocks offering has been the only factor that is causing the growth in both the equity value and stocks outstanding.
To further illustrate, I created the following chart that shows Tesla stockholders’ equity growth rate expressed in percentage.
Tesla Quarterly Stockholders Equity Growth Rate
The chart pattern above looks almost identical to the chart of common stocks outstanding growth rate.
You may notice that the major bumps which occurred in 3Q15, 2Q16, 4Q16 and 2Q19 in the chart above also occurred in the common stocks outstanding growth chart.
The identical chart pattern tells us that the growth in shareholders equity had been primarily due to the issuance of stocks that occurred in 3Q15, 2Q16, 4Q16 and 2Q16. In other words, it was through common stocks issuance that fueled the growth of shareholders’ equity instead of from the company generated profits.
Furthermore, after the 4Q 2016 stock issuance, shareholders’ equity has not grown until another major stock issuance in 2Q 2019. From 1Q 2017 to 1Q 2019, shareholders’ equity has been sort of flat and has fluctuated between the $4 billion and $5 billion level. In fact, stockholders’ equity has declined slightly in early 2018. The reason for the decline is there has been no major stock issuance until 2Q 2019 which has caused another pop in stockholders’ equity value.
During the period of flat equity value between 2016 and 2019, shares outstanding still increased steadily even though there had been no major stocks offering. The growth in shares outstanding was primarily caused by stock based compensation that had been given to employees and also convertible debts that may have been converted to equity.
Do note that these practices do not result in the growth of stockholders’ equity. As seen from the chart of stockholders’ equity, the value has actually declined between 2016 and 2019.
While there have been increases in stockholders’ equity, stock outstanding has also been increasing simultaneously. As a result, shareholders’ equity per share (book value per share) does not increase in tandem with the increase in equity value and it may actually decrease in value. The positive effect of increase in stockholders’ equity has been neutralized or even negated by the negative effect of the increase in stocks outstanding.
Coupled with the effect of stocks issuance from stock based compensation and possibly convertible debts, shareholders’ equity per share value has been severely diluted. In short, Tesla stock dilution increases in line with the increase in shares outstanding.
Between 2015 and 2019, Tesla common stocks outstanding has increased dramatically from 126 million outstanding shares to 178 million outstanding shares. During the same period, stockholders’ equity has not increased significantly enough to counter the effect of the increase in shares outstanding, thereby causing stock dilution to existing shareholders.
Furthermore, the growth in stockholders’ equity does not come from the company generated profit. Instead, it comes from stocks offerings which have been the major factor that fuels the growth in equity value.
Stock based compensation has further worsened the common stocks outstanding issue because Tesla has been granting more common stocks to its employees every quarter as part of the company employees reward program.
Both stock issuance practices have made existing common stocks less valuable due to the effect of stock dilution. As seen from the shareholders’ equity chart, equity value has not increased since 1Q17 as the company has not made any meaningful profit and there was no major stock issuance for capital raise.
Shareholders equity growth from 2015 to 2016 was mainly fueled by common stocks issuance which then led to more stock dilution.
References and Credits
1. All financial figures in this page were obtained from Tesla Investor Relation website: Tesla Investor Relations.