Should Tesla Buy Back Their Stock?
Jeremy Johnson's picture

Should Tesla Buy Back Their Stock?

The 3rd largest individual share holder of Tesla, Leo Koguan said on CNBC that Tesla should immediately spend cash to do stock share buy backs. We'll go over the options Tesla has now and if share buy backs make sense right now.

Should Tesla Buy Back Their Stock?

The 3rd largest individual share holder of Tesla, Leo Koguan, said that Tesla should immediately announce that it plans to buy back $5 billion of Tesla shares this year and $10 billion next year. This is due to a drop in Tesla share price this year and he thinks this will help the company. This is from CNBC.

A share buyback functions with Tesla taking cash off their balance sheet and buying stock. The buying of this stock will reduce the total number of outstanding shares, and this will increase Tesla's earnings per share because there will be less shares floating around to spread the earnings around to.

If Tesla has 100 shares and earned $1 per share and bought back half their stock and then there was only a total of 50 shares floating around, the same earnings would produce $2 per share of earnings and should in theory raise the stock price. This is a way to return capital to share holders.

Will Tesla do buy backs and dividends eventually? This is a way to give cash to share holders as well and there is a debate about whether Tesla should do this. If a company views their share price as undervalued, then a buy back with cash makes sense. A dividend makes more sense if the share price is value appropriately.

Tesla In the Future

Buy backs are generally a better idea to reduce share count floating around and to increase the value of the company. A dividend should only be paid if a company cannot find out how to spend capital in any other way, including share buy backs.

Elon Musk has made comments at times that Tesla is not capital constrained which would mean he doesn't see a way for Tesla to spend all of its capital for growth.

What about the Bitcoin acquisition? If Tesla spends $1.5 on Bitcoin, why not just return that capital to share holders? It's a valid question and Tesla's answer to that question was to have a very liquid way to get that capital back if they wanted and to have an alternative asset. Tesla is also taking the chance that they could get capital appreciation on their Bitcoin purchase.

The conversation about a buy back is still a very important one. Tesla has paid down $5 billion of debt and increased their free cash flow while also investing in and building Giga Berlin and Giga Texas. Right now, Tesla's debt, outside of vehicle loans, is basically nothing.

Tesla's main capital expenditures are going to go toward building new factories, but once they have all the factories they need built, Tesla is going to have much more cash than they know what to do with. With $20 billion of cash on hand, they could use that cash to do share buy backs. This seems to be the magic number for Tesla and it does reduce risk by having so much cash on hand.

Should Tesla buy back their stock? Would this help the company and share price? Is it better to reduce risk and keep cash on hand?

For more information, see this video by Tesla Daily:

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Jeremy Johnson is a Tesla investor and supporter. He first invested in Tesla in 2017 after years of following Elon Musk and admiring his work ethic and intelligence. Since then, he's become a Tesla bull, covering anything about Tesla he can find, while also dabbling in other electric vehicle companies. Jeremy covers Tesla developments at Torque News. You can follow him on Twitter or LinkedIn to stay in touch and follow his Tesla news coverage on Torque News.

Image Credit, Tesla Daily, Screenshot

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