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Tesla stock will fall if Musk pay deal is not approved: Analyst

Tesla (TSLA) shareholders are set to vote on CEO Elon Musk's controversial pay package. With uncertainty looming over the vote's outcome, Guggenheim Securities Automotive Equity Research Director Ronald Jewsikow joins the Morning Brief to discuss how the results could affect Tesla's stock price and operations.

Jewsikow believes shareholders will vote in favor of the pay package, saying "It's a mix of promises made and promises kept." However, he outlines a "a small win, big loss" scenario. If shareholders were to approve the package, he believes there would be minimal upside reaction in the stock. On the other hand, if shareholders were to vote against the package, Tesla stock could plummet.

Jewsikow predicts Tesla's share price could fall nearly $45 if the vote is not approved. "I think there is a considerable amount of premium for Elon Musk being engaged and developing AI in Tesla currently, just based on where we think the fundamental value of the business is," Jewsikow tells Yahoo Finance.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

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This post was written by Angel Smith

Video transcript

What is your anticipation of how this will net out in the vote based on what we've seen previously and how you're expecting the stock to move coming into this.

Yeah, thanks for having me w we think the shareholder vote is going to pass.

I think it's a mix of promises made promises kept, which is kind of what we saw in 2018 vote, vote hold serve.

Um Running the math on most major institutions and how they voted last time.

You, you still do get a narrow passage if, if voting holds serve and retail Elon has indicated is 90% in favor.

It's just a question of the variable of what percentage of retail investors are actually voting for this.

Um In terms of the stock reaction, we've characterized it and I think most on most of the investors we talked to agree is it's, it's, it's a small win, big loss scenario.

Uh In the event it passes stocks probably up slightly on Elon retaining Elon the A I efforts that he sees in the company and in the event it fails.

Uh I think it introduces risk that ultimately we don't think Elon's gonna leave.

We think developing A I and Tesla for a lot of reasons, makes sense in terms of cost of capital, the liquidity profile.

But it does introduce the risk that he spends more time developing A I and shifting talent elsewhere.

So I think that at least the narrative that, that he could spend more time elsewhere would, would gain steam and the stock would, would be down quite considerably in the event this fails.

Ron just really down a bit more.

I guess.

What more specifically do you think that stock reaction to the downside if those risks, if it's not approved, what that ultimately looks like?

Yeah, we have, we haven't put specific numbers around the downside.

It's really tough to quantify too, but I would say that our price target is, is about $45 lower than here.

I think there's a considerable amount of premium for Elon Musk being engaged and developing A I in Tesla currently.

Um just based on where we think the fundamental value of the business is versus the I I would say more uh hope fueled parts of the business.

Um But in terms of specific quantification, we have, we have not put a number out.

Elon Musk has said in the past that he might reallocate how he spends his time.

If this vote doesn't go through in, in his favor, what would you expect then?

Yeah, we, we've seen some capital raising at Xa I and I think his other, his other ventures.

But ultimately, the cost of capital at Tesla is so much lower than any of his other start ups that I if he's serious about developing A I and I I appreciate his, his terminator e tail risk of if A I become sentient.

But um ultimately the cost of capital to develop it at Tesla is much lower.

There's a lot of talent already in place.

Yeah, outside of the the control elements developing it in Tesla has the most prospects for success.

I think ultimately, when it comes to the shareholder vote, exactly how it's going to break down.

Of course, a lot of it is just a question of how many of the uh individual shareholders, how many of them actually cast votes.

And of course, where the institutional side of this all comes in.

If you take a look back at 2018, big institutions were pretty much split a couple of years ago.

Do you think that's likely going to be the case this time around?

Yeah.

And we, we've seen that publicly with various institutions announcing for or against in advance of this vote.

I think ultimately, we think institutions largely hold serve with how they voted in 2018.

And that is why we think this vote passes.

But if a few large institutions pivot from how they voted in 2018, whether that is, is for their own internal reasons or because of a shift in their, their ownership base um that, that could swing the vote more negatively.

But ultimately, if votes hold how they did in 2018, this, this will pass as long as retail turnout is, is relatively strong.