Tesla, Like Others, Seeks to Take Advantage of Texas Tax Rates
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Tech firms have been leading the stock market gains over the past two months. Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Facebook (NASDAQ: FB), and Netflix (NASDAQ: NFLX) are prime examples of these gains. Another tech company that has been on a roll recently is Tesla, Inc. (NASDAQ: TSLA).
The company reported $0.56 earnings per share in Q2, which was an increase of 16% from Q1. That’s a massive improvement from their year-end report from 2019 in which they reported a net loss of $4.92 per share. Tesla reported a gross profit of over $1.2 billion in Q2. A massive jump from Q4 in 2019 in which they had a gross profit of $566 million.
Despite the COVID-19 pandemic, factory shutdowns, and a decrease in automobile sales, Tesla is continuing to surprise investors. The stock hit a 52-week high on Monday, July 27th at $1,513.24, and is currently around $1,487.
While Tesla’s stock has fallen prey to stock option shorting and day traders, or “pajama traders” as many longtime investors, such as Jim Cramer, are calling them, the company has continued to increase their gross profit and, in turn, their market capitalization.
Musk is also famous for causing disruptions in the company’s stock through his tweets, such as saying the stock price is “too high”. His tweets have caused pangs in Tesla’s stock price before. However, the company has outperformed both his tweeting habits and the current economic downturn. Now, Musk is making a major move to increase the performance of Tesla’s stock by taking advantage of the tax rates in Texas.
(Data provided by Yahoo! Finance)
On July 22, the governor of Texas, Greg Abbott, along with Elon Musk, announced a Cybertruck factory will be built in Texas. Abbott said the “Gigafactory will employee thousands of Texans & be a cornerstone for next generation innovation.” Musk has said that anyone who is interested in working at the new factor should contact Tesla.
Musk announced back in May that he would be selling his property in California and moving out. However, the Fremont factory is continuing operations and the decision to build the Cybertruck factory in Texas was in the works before Musk’s statement.
California is home to many of the United States’ Fortune 500 companies, including Apple, Intel, Chevron, HP, and Wells Fargo. It accounts for 14.6% of the national GDP. It’s also home to many entrepreneurs and startup companies, but recently many companies have been moving out of California. In 2019, the U.S. Census Bureau reported net domestic migration loss in California of 203,414.
One reason they are leaving is because of the Golden State’s high tax rates. California has one of the highest tax rates in the country. A key difference between Texas and California is that Texas does not have a state income tax.
Although Musk still lives in California and does not actually receive a salary income from his automobile/energy company, he would still benefit from the factory being built in Texas rather than other states with higher tax rates because his compensation comes in the form of Tesla shares. Currently, he owns roughly 20%, or more than 34 million shares, of Tesla.
Being compensated with shares in the company is common for many CEOs. But since Musk only receives compensation from his stock ownership, he is more invested in the financial performance of Tesla. One of the largest liabilities for companies is their tax bill.
Taxes decrease net earnings per share, which hurts the value of the stock. Tesla reported that their tax expenses reduced their gross profit by 32%. The tax benefits of Texas would be immediately beneficial to Musk, since the CEO’s shares of Tesla, Inc. stock make up close to 75% of his $71.4 billion net worth.
Musk is not alone in his decision to reap the tax benefits of Texas for his company. Podcast host Joe Rogan also announced that he will be moving to Texas. This comes after Spotify signed a licensing deal with Rogan for $100 million.
A number of California’s Fortune 500 companies have moved their businesses from California to Texas, including Charles-Schwab, Occidental Petroleum, and Core-Mark. The Lone Star State is now home to 54 Fortune 500 companies.