Tesla (TSLA) has been making a lot of news recently — and for all the wrong reasons. The stock is down more than 50 percent from its all-time high three months ago, and while the skid has leveled off recently, it’s by no means certain that the bottom is in. What was arguably once Tesla’s biggest asset — its myth-making CEO Elon Musk — may now be its biggest liability.
It’s not just Musk’s latest actions as part of the Department of Government Efficiency (DOGE). It’s also that Musk pledged a significant portion of his Tesla stock to buy Twitter (since renamed X), which increasingly threatens Tesla’s investors, if the stock continues to plunge. Here’s how the Tesla CEO’s indebtedness could quickly become shareholders’ problem, too.
Elon Musk: Key-man risk for Tesla investors
Investors handicap risk all the time, and Elon Musk presents what they call “key-man risk.” Normally, what investors mean by this term is that an individual, often a CEO or founder, is so vital to the successful operation of the business that to lose him or her would be a severe loss.
But like so much else, Musk is flipping the script on what key-man risk means. In his case, Musk presents a range of risks if he continues to stay with the electric vehicle maker. Musk has long overpromised and underdelivered, forecasting self-driving cars next year — every year since 2016. It’s this kind of hype that helped propel Tesla stock to the moon, making him the world’s richest person.
Consumers are revolting, for now, against Musk’s involvement in the Trump administration and various other antics, and it’s been fierce. Sales are plummeting in Europe, dipping a stunning 50 percent in January, including a 60 percent decline in Germany, the continent’s largest EV market. What’s more, 94 percent of Germans say they won’t buy a Tesla, in a March survey conducted by t-online.
It appears to be a similar, but less pessimistic, situation in the U.S., where people are also boycotting the company and vandals have been coming for Tesla’s dealerships and vehicles more broadly. Plus, the National Highway Traffic Safety Administration is recalling nearly all Cybertrucks due to a faulty adhesive on their exterior. It’s gotten to the point where President Donald Trump is now acting as a pitchman for Tesla cars on the White House lawn, while Secretary of Commerce Howard Lutnick is out telling investors to buy Tesla stock.
And Musk himself led an all-hands call last week urging his own employees to hold on to their stock while using much of the same “look at the amazing future” rhetoric that has worked so well on external investors. Meanwhile, his brother Kimbal Musk has been selling millions of dollars of Tesla shares in the last few months, including a block of $27.5 million in early February, when the stock price was higher.
This is all prologue to the financial issue that could help push Tesla shares still lower. While the issue is already known, it may come into play if Tesla stock continues to drop.
Musk has pledged huge amounts of Tesla stock as loan collateral
Musk’s indebtedness could begin to hurt the stock if shares continue to fall as they have recently. That’s because Musk has pledged huge amounts of stock to back personal loans — meaning he has borrowed against the value of the stock, much like a margin loan, with financial institutions. The risk is material enough that the company reports it as part of its annual 10-K statement.
The filing notes: “If Elon Musk were forced to sell shares of our common stock, either that he has pledged to secure certain personal loan obligations, or in satisfaction of other obligations, such sales could cause our stock price to decline.” Further: “If the price of our common stock were to decline substantially, Mr. Musk may be forced by one or more of the banking institutions to sell shares of Tesla common stock to satisfy his loan obligations if he could not do so through other means.”
How much are we talking about here? A loan that’s only a small percentage of Musk’s total holdings or Tesla’s shares outstanding would likely have only a modest impact on the stock, if any. But Musk’s holdings are substantial, and so is the number of his margined shares.
Per the 2024 preliminary proxy filed in April 2024, Musk held approximately 715 million shares, which made up about 20.5 percent of Tesla’s outstanding shares, as of March 31, 2024. Of that amount, Musk had pledged 238.4 million shares, almost exactly one-third of his holdings. For comparison, Musk’s holdings and pledges were the same in 2023, but somewhat higher in 2022.
Significantly, while Musk now owns fewer split-adjusted shares than in 2022, the percentage of pledged shares is approximately the same, at around 33 percent.
The interesting detail about the value of shares Musk has pledged is that it matches up so closely to a Musk pay package that’s been the subject of litigation. The value of Musk’s pledged shares comes to about $63.4 billion (at the recent stock price of $266) — almost exactly the headline amount of a huge compensation package that Musk is currently fighting to get, after being denied by judges twice previously. The rise in Tesla’s stock from last year, however, means the package of 303 million options is worth closer to $74 billion at a $266 stock price.
So in total, Musk has a bit less than 7 percent of Tesla’s stock pledged against his personal loans. Why is that problematic? It’s not because Tesla has granted him these loans, since it hasn’t. If Musk had to unload his shares for some reason — say, a lender wanted money back — then he might need to sell a significant chunk, and that could occur at an inopportune moment for the stock. In fact, it has a good chance of occurring at an inopportune moment.
That’s because the value of Musk’s debt remains the same regardless of what the stock does. The situation is fine as long as Tesla stock is flat or rising, egged on by Musk’s hype. But it can become sticky when the stock begins to fall precipitously, because Musk may need to put up more stock to secure the loan or otherwise liquidate part of the position to pay down debt. This situation is most likely to occur, however, when Tesla stock is already weak, exacerbating things.
Worse, if short-sellers figure that Musk will need to offload stock, they could begin to push the stock lower in anticipation of that, making the situation more dire for shares. Combine those technical factors with some fundamental weakness — say, a sales decline — and it could get dicey quickly.
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The thing is, the stock could continue to get a lot cheaper despite the haircut it’s already received. A back-of-the-envelope calculation suggests that Tesla would still have to fall a further 90 percent from today’s price just to hit the average price-to-earnings multiple of major carmakers.
And if Tesla’s sales are falling, there’s not a lot of reason it should get a lofty valuation.
Will Tesla’s stock continue its slump?
Wedbush analyst and noted Tesla bull Dan Ives has said that Musk needs to “change course” and should announce that he’s re-committing to spending more time on Tesla instead of working inside the White House. But the reputational damage may already be done and irreparable.
Of course, it’s not just the reputational harm that makes Tesla risky here. Tesla faces rivals like China’s BYD that are making inroads into electric vehicles, and a comeback in the stock may highly depend on Musk’s ability to hype the next big thing (humanoid robots, anyone?) that the company may never deliver. All those issues come as Musk has a financial interest that could hurt Tesla still more if it continues to fall. So Musk, the key man, presents some significant liabilities to Tesla investors.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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