Elon Musk lights blaze of speculation over gonzo share buyback a week before Tesla Q3 earnings

A full week after Singapore-based billionaire Leo KoGuan warned only a stock buyback or 100% earnings growth would pull Tesla out of its current slump, Musk finally replied to his third largest shareholder. 

“Noted,” he wrote on Thursday.

Minutes later the stock reversed its losses as investors took this as a clear sign that Musk might greenlight Tesla spending anywhere between $5 billion to even $10 billion on its first ever share buyback.

While Musk’s cryptic response may have left open what if anything he plans to do, he engages with his fan base on Twitter daily and their growing calls for a buyback will not have escaped his attention. 

The Tesla CEO couldn’t have chosen the timing any better: His company could announce a buyback when it reports third-quarter earnings on Oct. 19, after which Musk is free to sell whatever stock he needs to raise cash for his looming Twitter purchase.

A Delaware judge has given him until Oct. 28 to honor his $44 billion deal with the social media platform, or she will proceed with a five-day trial he’s widely expected to lose. The overhang from his pending acquisition has weighed heavily on sentiment as no one knows for certain just how many shares Musk may need to unload.

Overwhelming support

With the mood so grim, all it took for Tesla to hit a 52-week low on Thursday was the hotter-than-expected September inflation print of 8.2%. Later it even emerged Musk may be the subject of a federal investigation.  

Adding to his Twitter problems is the possibility that third-party investors are bailing on his deal. Reports suggest investors who originally signed on to provide $7 billion—such as Manhattan Venture Partners and Apollo Global Management—may now pull their equity financing. 

Buyback arguments

Tesla has valid arguments it can use next week to justify a buyback, should its board indeed approve one. Directors can argue buying back billions of dollars in the company’s own stock makes sense as the share price is weighed down by external factors such as the Federal Reserve’s rapid-fire rate hikes. With the company within arm’s reach of its blistering 50% annual volume growth target, a stock trading near one-year lows doesn’t properly reflect Tesla’s strong fundamentals.

Furthermore, any shares purchased before the end of the year would be exempt from an annual 1% tax, which will take effect in January as part of President Biden’s Inflation Reduction Act.   

Along with Apple, Tesla’s retail investor community is the largest among any mega-cap stock, according to Vanda Research, and no topic has been more hotly debated of late than a share buyback. 

A snap poll conducted on Tuesday by popular Tesla influencer Steven Mark Ryan showed overwhelming support among the nearly 11,000 users surveyed. 

‘Send a powerful signal’

One of those pushing heavily for a buyback is Alexandra Merz. The Tesla shareholder led a public campaign against the credit rating agencies that gave Tesla debt low market. After writing to them personally to urge them to upgrade Tesla debt from junk status, Merz posted their responses online. 

“We’ve got our blood in this company, we all spend much too much time talking about it, doing stuff about it, investing into it, and all the rest,” she said in a podcast on Thursday. “I think there should be some reward for retail investors.” 

The company has $18.3 billion in cash on hand, but there are questions as to how much of that is located in the U.S. Repatriating cash from abroad comes with a tax, which is why Apple issued bonds to fund its own buybacks.

“I want them to issue more debt, that was one of the reasons I was so much after this credit rating upgrade to investment grade, because that allows them to the issue bonds at a much lower spread, since they’re not junk rated,” Merz added.

Her sentiment reflects a broader shift among many small shareholders following the stock slump. Previously many argued Tesla should reinvest excess cash into growth. Musk has set the target of selling 20 million cars annually by the end of the decade, a 20-fold gain over last year, and this requires constant spending on new production capacity.

But the economic outlook for such investment has changed radically. 

In order to maintain its zero-COVID policy, China is imposing rolling lockdowns that damper growth. Europe meanwhile is largely cut off from Russian natural gas, and is therefore actively destroying demand to conserve energy supplies for the winter. And in North America, the Federal Reserve is quickly putting the brakes on the housing market, which is crucial for overall economic growth. In this scenario, Tesla may be less inclined to pour billions into a new car factory for at least another year, if not longer. 

Musk in turn would have an automatic buyer for his shares, and a higher price would greatly help him should he be forced to buy Twitter. Governance is not likely a problem either as the board, which includes his brother Kimbal, rarely interferes.

On Thursday, the Future Fund cofounder Gary Black penned an open letter to Tesla directors arguing for a $10 billion buyback funded out of its cash reserves rather than new debt.

Doing so would send in his words a “powerful signal that the board takes seriously its role of driving shareholder value.”