“Short at your peril.” That’s what some Tesla investors are saying in response to famed short seller Michael Burry’s latest warning, in which he slammed the EV giant as “ridiculously overvalued.” Burry took aim at the upcoming share dilution tied to CEO Elon Musk’s massive pay package, arguing that Tesla’s management hasn’t adequately informed shareholders about its impact.
Musk’s $1 trillion stock-based compensation plan, overwhelmingly approved by Tesla shareholders in a November vote, will dilute existing investors’ ownership by 3.6 percent each year, Burry said in his newly launched newsletter.
“Tesla’s market capitalization is ridiculously overvalued today and has been for a good long time,” Burry wrote. “With recent news of Elon Musk’s $1 trillion dollar pay package, dilution is certain to continue.”
Dilution affects a stock’s price by mechanically reducing a company’s profitability and value on a per-share basis. When new shares are issued for stock-based compensation, the company’s market value is spread across a larger number of shares, pushing down per-share metrics like earnings per share. If management doesn’t counterbalance this with buybacks or rapid growth, selling pressure can build.
Tesla bulls, however, are betting that the company’s future growth will outweigh the impact of dilution. Musk’s compensation package is structured as 12 tranches totaling 425 million shares. The first tranche of 35.3 million shares unlocks once Tesla’s valuation hits $2 trillion (up from the current $1.4 trillion). Some investors believe Tesla could reach this milestone as early as next year, if its robotaxi service takes off.
“There will be some dilution, but not much,” Noah Hamman, founder and CEO of EFT investor AdvisorShares, told Observer, adding that “the resulting valuation you will get from that news will be huge.”
Musk’s new pay package is structured similarly to the one approved in 2018. That earlier plan didn’t dilute the stock thanks to Tesla’s meteoric expansion (from a $54 billion valuation in 2018 to $650 billion in 2023), Hamman noted.
“There was no concern about dilution,” Hamman said. “I don’t know how anyone could have been unhappy with the stock.”
Matthew Tuttle, CEO of Tuttle Capital Management, known for issuing leveraged ETFs, backed some of Burry’s views.
“Burry’s core point is right: stock-based comp is not ‘free’ — it’s equity issuance used to pay wages, and the bill shows up as dilution (or as cash buybacks later, if the company chooses to offset it),” he told Observer. “When investors fixate on ‘adjusted’ earnings that add stock-based compensation back [later down the road], they can end up valuing a business on a pre-dilution fantasy.”
But Tuttle disagreed with Burry’s criticism of Tesla’s valuation. He argued that Tesla’s broad technological footprint, including EVs, autonomous vehicles, robotaxis, energy storage and software, means it can’t be valued as a pure-play automotive company.
If one of those options “hits at scale, the stock can stay expensive on conventional metrics for a long time,” he said.
