For February 21, our forensic accounting needle in a haystack comes from a car manufacturer with a massive spike in outstanding employee stock options.

Analyst Peter Apockotos found an unusual item in Tesla’s (TSLA) 2018 10-K.

On page 121 TSLA disclosed that its outstanding employee stock options nearly tripled from 10.9 million at the end of 2017 to 31.2 million (18% of shares outstanding) at the end of 2018.

Based on this increase in outstanding options and the change in the company’s stock price, we calculate that TSLA’s employee stock option liability increased from $1.6 billion in 2017 to $3.5 billion (7% of market cap) in 2018.

A significant portion of the increase in outstanding options comes from the performance award that the board of directors granted to Elon Musk last January (a decision we criticized at the time). TSLA disclosed on page 123 of its 10-K that they recorded $175 million (1% of revenue) in stock compensation expense related to the performance award.

Tesla’s valuation already implies an unrealistic level of growth and profitability. The more Tesla dilutes existing shareholders to enrich its CEO, the harder it will be for the company to create value for any other investors.

The Power of the Robo-Analyst

We analyzed 79 10-K filings yesterday, from which our Robo-Analyst[1] technology collected 8,328 data points. Our analyst team used this data to make 1,691 forensic accounting adjustments with a dollar value of $909 billion. The adjustments were applied as follows:

• 676 income statement adjustments with a total value of $60 billion
• 732 balance sheet adjustments with a total value of $423 billion
• 283 valuation adjustments with a total value of $426 billion

We believe this research is necessary to fulfill the Fiduciary Duty of Care. Ernst & Young’s white paper, “Getting ROIC Right”, demonstrates how these adjustments contribute to meaningfully superior models and metrics.

[1] Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.