The market is taking a beating today, and Tesla (NASDAQ:TSLA) isn’t excused from this turmoil. Today’s 6% decline in TSLA stock is emblematic of a market that continues to fail to find a reason to hold a sustainable rally.
That said, the price action with Tesla has been choppy of late. Yesterday, TSLA stock surged higher amid a market recovery, and a conspicuous tweet from the company’s CEO Elon Musk when prompted to consider a share buyback. To the company’s third-largest shareholder, Musk responded “noted” to suggestions that a buyback may be necessary to pull the company’s stock price out of the gutter.
This tweet, along with upcoming earnings on Oct. 19, provides the backdrop for a speculation-fueled rally to take hold. If enough investors believe that Musk will announce a buyback, which would also theoretically help Musk in his bid to buy Twitter (NASDAQ:TWTR), it could become a self-fulfilling prophecy.
Let’s dive into why such a buyback may or may not happen.
Will Musk Buy Back $10 Billion in TSLA Stock?
Various numbers have been floated with respect to how large a potential buyback would be. It appears a $5 billion to $10 billion buyback would be required to move this stock price, given the size of the company. And those calling for a buyback certainly have some interesting reasons for why it makes sense.
Supporters of a buyback argue that Tesla is a company that’s likely to produce more than $50 billion in cash flow from operations over the next three years. Bulls argue that this capital won’t be needed to fuel growth, and should be returned to shareholders. Additionally, if Elon needs to sell shares to fund his Twitter acquisition, selling them back to the company would mean that existing shareholders may not get as hurt by this selling pressure.
That said, there are plenty of skeptics when it comes to this proposed buyback. Growth companies tend to reinvest their cash into their core business. That’s because the rate of return a company like Tesla can get on its capital is likely to far exceed the value shareholders might receive from a buyback. This is a logical argument and one that’s hard to refute.
That said, from a business standpoint, Musk has made some intriguing decisions of late (such as his bid to buy Twitter). Who knows what will be in store when Tesla reports earnings next week?
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
