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Musk's pay tied to Tesla's product and profit milestones

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Tesla's valuation depends on investor perception and

growth

potential

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ARK has predicted Tesla's market cap could reach $7

trillion-$10.9 trillion by 2029

By Abhirup Roy and Akash Sriram

SAN FRANCISCO, Sept 9 (Reuters) - How can Tesla

become an $8.5 trillion company? That's the market

valuation the electric vehicle maker would have to reach to

justify CEO Elon Musk's new pay package announced last week.

Selling 100 million humanoid robots in a year could do it;

creating a robotaxi network with more than 10 times the revenue

of Uber ( UBER ) might as well. And of course, investor hope is

part of the equation.

Musk on Friday was given a decade to expand Tesla's $1

trillion valuation into a company worth more than the combined

current value of Nvidia ( NVDA ) and Microsoft ( MSFT ), the two

most valuable publicly traded companies in the world. If he

succeeds, Musk, already the best-paid CEO in the world, would

receive a trillion-dollar pay package.

Musk's new pay package was granted on September 3, but it is

subject to shareholder approval in November.

The board showed how and where it expects Tesla to make its

money by structuring Musk's pay package around 12 milestones

that are primarily based on products and profit, as well as

market capitalization. They target enormous increases in profit

as Tesla rolls out its Optimus humanoid robots and a robotaxi

fleet that it hopes will be more efficient than human-driven

rivals.

A lot depends on how investors value the company. Tesla, for

example, is valued as a growth stock, trading at around 75 times

its earnings before interest, taxes, depreciation and

amortization, or EBITDA, even though its vehicle sales dropped

last year and are likely to drop this year.

The payoff is astounding - and so are the goals. Gene

Munster, managing partner at Deepwater Asset Management, broadly

estimated that robotaxis and self-driving software could be

worth a trillion dollars of market cap each, with cars another

half-trillion. "At the end of the day, the reason why this is

going to work or not work really comes down to Optimus," he

said. "It's a fairy tale, but it's one that could actually

happen."

Musk has been betting the company on self-driving software

and robotaxis for some time. Tesla currently has a small fleet

of robotaxis - estimated to be about three dozen vehicles - in a

part of Austin, Texas. An early Musk milestone is to have a

million robotaxis in operation.

One of Tesla's biggest fans, ARK Invest, predicted an even

sunnier case well before the Musk pay package was announced.

They see Tesla's market capitalization hitting $7 trillion to

$10.9 trillion in 2029, with a Tesla robotaxi network bringing

in between $603 billion and $951 billion of ride-hail revenue

per year. Global ride-hailing leader Uber ( UBER ), by comparison, will

have revenue of $52 billion this year, according to LSEG.

Tesla would start off owning and operating a robotaxi

network, which would eventually be taken on by another company,

ARK forecast. Tesla's share of the ride fare would be 40-60%,

double that of Uber ( UBER ), ARK said.

ARK did not include a valuation for robots in its model,

although it said that could become a $24 trillion market.

BANKING ON BOTS

More recently, Musk has described robots as the future, saying

the Optimus humanoid robot could account for 80% of Tesla's

value eventually.

If Tesla's future depends on Optimus, it will have to sell a

lot of robots - maybe more than 100 million a year, according to

Reuters calculations.

If Tesla's business was only robots, that 100 million figure is

what it would take to hit the top EBITDA profit target, as

specified in the Musk pay package, of $400 billion. Optimus is

expected to be priced at around $25,000 and Tesla's current

EBITDA profit margin is around 15%. For twice the profit margin,

Tesla would have to sell only half as many robots.

EBITDA this year is expected to be $13 billion, according to

LSEG, so Tesla has a long way to go.

Much will also depend on how investors calculate Tesla's

potential at the end of the decade-long pay package. If

investors were to continue pricing Tesla at 75 times EBITDA, it

would take $113 billion in EBITDA for Tesla to reach a $8.5

trillion valuation, or less than the profit goal Tesla has set

in Musk's pay package. That package has a top EBITDA of $400

billion and a top market cap of $8.5 trillion, a multiple of

21.

The $400 billion target was "materially more aggressive"

than Morgan Stanley's predictions on Tesla's auto, energy and

robotaxi businesses, its analysts said in a note on Sunday,

adding that it "would imply substantial contributions from

Optimus and other AI robot end markets currently not in our

forecasts."

Some investors welcomed the focus on the new products and said

the proposed pay might help address what is ailing the company

now.

"There are big operational hurdles that Tesla does need to

accomplish," said Will Rhind, CEO of global ETF issuer

GraniteShares. "There are things that clearly need to be

reversed, such as declining sales, et cetera. So, why not tie

the CEO's compensation to reversing some of those trends?"