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Tesla Shares Outstanding and Effect of Stock Dilution

Tesla Model S dahsboard. Flickr Image.

You may not know it, but Tesla’s shares outstanding has been creeping up steadily over the years and hit record high as of 1Q 2020. The increases in common stocks may lead to stock dilution, an effect that will reduce the ownership of existing shareholders. Other than getting a smaller ownership, the effect of stock dilution could also reduce earning per share (EPS) as stock count has increased.

The good news is that stock issuance comes with less risk as opposed to debt offering. In this regard, Tesla does not have to repay the capital. The only downside with stock issuance is that it dilutes the control of the company.

To keep things simple, let’s first find out what has been causing the increases in Tesla’s stocks outstanding.

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

Tesla stockholders equity Q1 2020

Tesla stockholders equity Q1 2020

From the snapshot above, Tesla has not issued any preferred shares as of Q1 2020. While there has been no preferred shares issued, the number of authorized preferred stock is 100 million. Theoretically, Tesla can issue up to a maximum of 100 million preferred stocks.

On the other hand, there are 2 billion common stocks authorized. Theoretically, Tesla can issue up to a maximum of 2 billion common stocks. As of 1Q 2020, Tesla has issued up to 185 million common stocks.

Chart of Tesla’s Shares Outstanding

Tesla common stocks outstanding

Tesla common stocks outstanding

The chat above tracks Tesla’s quarterly common stocks or common shares outstanding for the previous 5 years from 2015 to 2020.

The trend of the plot shows that Tesla’s outstanding stocks have increased significantly over the period.

For example, Tesla’s outstanding common stocks was only 126 million in Q1 2015 but the number has increased to record high of 185 million as of Q1 2020. The growth in Tesla’s shares outstanding between 2015 and 2020 was roughly 47% over the 5-year period. On average, the company increases its common stocks outstanding by nearly 9% per annum.

What exactly is causing Tesla’s common stocks outstanding to increase at such a dramatic rate? To find out, we will look at the chart of growth rate which is shown below.

Tesla’s Stocks Outstanding Quarterly Growth Rate

Tesla common stocks growth rate

Tesla common stocks growth rate

The chat above tracks Tesla’s shares outstanding quarterly growth rate expressed in percentage for the past 5 years from 2015 to 2020.

From the chart, we can see that there are a few large spikes that occurred 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.

Moreover, the one occurred in 4Q 2016 was also quite significant when share count increased by close to 8% from the prior quarter.

Shares outstanding also increased substantially in 1Q 2020 by slightly more than 2% on a quarterly basis.

While there were only a few major increases in stocks outstanding, the growth rate has been entirely positive throughout the period from 2015 to 2020, indicating that Tesla’s common shares outstanding increment has persisted quarter by quarter.

Some of the quarters may show less than 2% growth, but they added up quite substantially over the 5-year period.

The following paragraphs detail what really happened when a large jump in stock count occurred.

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.

Stocks Issuance in 2Q 2016

There was a large jump in share count by more than 10% in 2Q 2016. This was one of the largest increments 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 in just a single quarter.

According to the 2Q 2016 quarterly filing, the growth in stock count was primarily due to Tesla’s capital raise from common stocks issuance. 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 remaining share growth was due to 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

The second largest jump in stocks outstanding occurred in 4Q 2016. The percentage of growth was around 8%. In 4Q 2016, Tesla’s common stocks outstanding increased from 150 million to 162 million in 4Q 2016.

Based on the company 4Q 2016 quarterly report, Tesla added 12 million more shares in this quarter alone 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 growth 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 stock issuance had caused the common stocks outstanding to increase by nearly 4% in 2Q 2019.

Stocks Issuance in 1Q 2020

The 2.2% stock outstanding growth in 1Q 2020 was primarily due to Tesla’s common stocks issuance to raise $2.31 billion of cash. The respective stock issuance has added 3 million more shares to Tesla’s shares outstanding.

Tesla’s Stock Based Compensation

Aside from 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:

Tesla stock based compensation disclosure

Tesla stock based compensation disclosure

The following chart shows Tesla quarterly stock based compensation expenses for the past 5 years from 2015 to 2020.

Tesla stock based compensation expenses

Tesla stock based compensation expenses

Stock based compensation is a type of stock issuance but is given as a reward in exchange for services and is treated as an expense in the income statement.

As opposed to stock issuance for capital raise, Tesla would be the “buyer” of the common stocks issued under stock based compensation. The cost of purchasing the stocks is treated as a 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 between stock based compensation and stock issuance for capital raise is that both of them can cause stocks dilution because more stocks are issued. However, stock based compensation is worse off since Tesla is using its own money to “purchase” the stocks issued to employees. In contrast, Tesla is getting cash when offering stocks to equity subscribers.

As seen from current chart, Tesla’s stock based compensation has increased substantially over the 5 year period and hit record high in 4Q 2019 at nearly $300 million. In 1Q 2020, Tesla issued about 1 million of common stocks as part of its stock based compensation program and the recorded expense was slightly more than $200 million in the same quarter.

The Never-Ending Growth of Tesla Shares Outstanding

From prior discussion, the growth of Tesla shares outstanding has been mainly boiled down to the following two reasons:

  • Stocks issuance for capital raise and acquisition. This has been the main reason of stocks outstanding growth over the 5-year period from 2015 to 2020.
  • Stock based compensation. Tesla has been granting stocks to its employees every single quarter to reward its employees. In recent quarters, stock based compensation expenses have been getting larger as seen from the above chart and has exceeded $200 million on a quarterly basis in 2019 and 2020.

The following snapshot extracted from Tesla’s Q1 2020 quarterly filing shows 1 million commons stock issued as part of the company’s equity incentive rewards.

Tesla issued 1 million shares

Tesla 1 million shares issued as stock based compensation

In short, stock issuance and stock based compensation have been the main reasons of the increasing stock count and shares outstanding over the years.

Effects of Increasing 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

Basically, shareholder’s equity is the book value of the company or what we call the net worth of the company after subtracting total liabilities from total assets.

Coming back to the stocks dilution issue. Shareholders’ equity per share can be calculated as follow:

Shareholders’ equity per share = shareholders’ equity / number of shares outstanding

From the equation above, shareholders’ equity per share will be getting less if the denominator which is the share count keeps increasing while shareholder’s equity stays constant or increases at a slower rate. In other words, existing shares are diluted when new shares are added as the value of equity per share decreases.

In short, stocks or equity dilution occurs when the value per share or net worth per share of the company is being reduced, thereby rendering existing shareholders to be worth less.

Conclusion

Between 2015 and 2020, Tesla’s common stocks outstanding has increased dramatically from 126 million outstanding shares to 185 million outstanding shares as of 1Q 2020. 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 and stock based compensation have made existing common stocks less valuable due to the effect of stock dilution.

References and Credits

1. All financial figures in this page were obtained and referenced from Tesla Investor Relation website: Tesla Investor Relations.

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

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