Should Tesla Initiate A Buyback Amid Stock Slump? Here's What One Of Its Biggest Shareholders Thinks

Zinger Key Points
  • As Tesla stock trades in correction territory, one of its biggest shareholders has recommended the company buys back its shares.
  • For Tesla, however, it will be a trade-off between investment needs and its commitment toward shareholder returns.

Tesla Inc TSLA shares have been on a downward trajectory ever since CEO Elon Musk disclosed a passive stake in social media platform Twitter Inc TWTR.

What Happened: From the $1,084.59 at which Tesla stock closed on April 1, the session ahead of the disclosure, the stock has lost about 35%.

The sell-off has started chatter on what the EV maker should be doing to lift its sagging stock.

Indonesian-born, Chinese-American businessman Leo Koguan, the third-largest shareholder of Tesla, suggested the company commence a buyback.

Tagging Martin Viecha, Tesla's senior director, Investor Relations, KoGuan said Tesla "must" immediately announce a $5 billion buyback from its free cash flow this year and follow it up with a $10 billion purchase in 2023. He also stated the buyback should in no way affect Tesla's cash reserves and shouldn't be financed by debt.

Related Link: Twitter Gives Its Version Of Events: Elon Musk Didn't Carry Out Due Diligence In Rush To Grab $44B Deal

Why It's Important: Tesla has never implemented buybacks in the past but has split its stock twice. A buyback essentially reduces the supply, as the company purchases the shares and holds it as treasury stock — a category of stock that is not available for trading in the open market. This in turn boosts share price.

A buybacks will also theoretically boost the company's earnings per share — a metric calculated by dividing net earnings by the number of outstanding shares.

Although part of the stock weakness is attributable to Musk's tumultuous Twitter takeover deal, some of it has to do with the broader market weakness amid the macroeconomic uncertainties and the China lockdowns that have impacted production at Tesla's Giga Shanghai.

Given Tesla operates in a capital-intensive industry, Tesla cannot afford to make massive shareholder returns and may instead prefer to plow back much of its profits into its business. At the end of the first quarter, the company's balance sheet boasted of cash and cash equivalents of $17.51 billion.

Meanwhile, Tesla has put out feelers that it may announce a stock split.

TLSA Price Action: Tesla stock was seen trading up at $713.30, according to Benzinga Pro data on Thursday at publication.

Posted In: electric vehiclesElon MuskEVsLeo KoguanNewsBuybacksTop StoriesTechMedia