Elon Musk's compensation code: How Tesla achieves the goal of an 8.5 trillion market value?

Tesla's latest compensation plan designed for Elon Musk sets an extremely ambitious goal for the electric vehicle manufacturer over the next decade: a market value of $8.5 trillion.

As mentioned in a previous article, Tesla announced this new incentive plan on September 3, pending approval at the November shareholder meeting. The plan requires Musk to increase Tesla's current market value of about $1 trillion to a level exceeding the combined current market values of Nvidia and Microsoft over the next ten years.

At the core of this plan, Tesla's board has set 12 milestones for Musk linked to products, profits, and market value. This indicates that Tesla needs to achieve large-scale sales of humanoid robots, establish a massive robotaxi network, and rely on investors' continued confidence in its growth potential.

Despite expected declines in vehicle sales last year and this year, Tesla's current valuation is still about 75 times its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). ARK Invest previously predicted that Tesla's market value could reach between $7 trillion and $10.9 trillion by 2029, far exceeding Musk's compensation plan target. However, Morgan Stanley analysts believe that the $400 billion EBITDA target is "more aggressive than expected."

Robotaxi Network Faces Huge Expansion Pressure

Musk's new compensation plan no longer solely focuses on vehicle production but places greater emphasis on profit growth from the new robotaxi business.

Gene Munster, managing partner at Deepwater Asset Management, estimates that robotaxi and autonomous driving software could each contribute $1 trillion in market value, with the automotive business contributing another $500 billion. "Ultimately, whether this plan succeeds really depends on Optimus," he stated:

"It's a fairy tale, but it could come true."

In Tesla's planning, establishing a massive robotaxi network is a key step to achieving the market value goal. Tesla currently operates about 36 robotaxis in Austin, Texas, with Musk's early milestone being to scale it up to 1 million.

Before the compensation plan was announced, one of Tesla's staunchest supporters, ARK Invest, had predicted that Tesla's robotaxi network could generate annual revenue of $603 billion to $951 billion. In contrast, global ride-hailing leader Uber is expected to generate $52 billion in revenue this year. ARK anticipates that Tesla's share of ride fees will reach 40-60%, double that of Uber.

ARK's model shows that Tesla will initially own and operate the robotaxi network, which will eventually be taken over by other companies. The firm also believes that the robot market could reach $24 trillion, but this has not been included in its valuation model

Humanoid Robot Business Becomes a Key Variable

If robotaxi is half of the blueprint, then the Optimus humanoid robot is the other half, and perhaps even the more important part.

Musk has recently stated multiple times that the humanoid robot Optimus could ultimately account for 80% of Tesla's value. According to media estimates, if the robot business alone is to achieve this profit target, assuming the Optimus is priced at around $25,000 and Tesla maintains its current EBITDA margin of about 15%, the company would need to sell over 100 million robots annually. Even if the profit margin doubles, annual sales would still need to reach 50 million units.

This is a huge challenge—according to LSEG data, Tesla's EBITDA is expected to be only $13 billion this year, far from the $400 billion target.

Morgan Stanley analysts pointed out in a report that the $400 billion EBITDA target is "much more aggressive" than their forecasts for Tesla's automotive, energy, and robotaxi businesses, and they believe this "would mean that Optimus and other AI robot terminal markets would make significant contributions, which are currently not included in our forecasts."

Valuation Multiple Determines Success or Failure

Ultimately, whether Tesla can reach an $8.5 trillion market value largely depends on how investors price its potential over the next decade. This is not just a mathematical question about profitability, but also a psychological game about market confidence.

An interesting calculation is that if investors continue to give Tesla the current EBITDA valuation of about 75 times, then the company only needs to achieve $113 billion in EBITDA to reach an $8.5 trillion market value, which is far below the $400 billion maximum profit target in the compensation plan. Conversely, if calculated with an $8.5 trillion market value and $400 billion EBITDA, the valuation multiple would drop to 21 times.

Some investors have welcomed the plan, believing it points the company in a new direction for development. Will Rhind, CEO of global ETF issuer GraniteShares, stated:

"Tesla does need to overcome some significant operational hurdles. Some things clearly need to be reversed, such as declining sales, etc. So, why not tie the CEO's compensation to reversing these trends?"