Tesla stock is set to drop as Elon Musk's $56 billion pay package unlikely to get approved, Wall Street analyst says

• Elon Musk's $56 billion pay package likely won't be approved by Tesla shareholders, according to Bernstein analyst Toni Sacconaghi.

• If the pay package is voted down, Tesla stock could fall 5%.

• "There is a concern that Elon Musk would become less engaged," Sacconaghi said.

Tesla investors are set to vote this week on Elon Musk's astronomical pay package, but according to Bernstein analyst Toni Sacconaghi, it's not likely to be approved.

The result of the vote on Musk's $56 billion compensation package will be announced at the company's annual shareholder meeting on Thursday.

According to Sacconaghi, Tesla stock could react negatively and fall about 5% if the package is voted down by shareholders.

And as it stands, the analyst says that looks increasingly likely.

"I think it's going to be tough to pass. The math is relatively straightforward. You have to get a majority of votes of shareholders that vote, and part of the challenge for Tesla is that not everyone votes," Sacconaghi told CNBC on Monday.

Tesla's highest voter turnout has been 63%, and even if 75% of Tesla shareholders vote on the measure, it's still going to be tough for Musk to win approval.

That's because proxy advisors have recommended investors vote "no" on the compensation package, and passive investors, which make up about 20% of Tesla's investor base, are likely to follow that advice.

"Very quickly, you see a pretty big 'No' cohort. I think mathematically it's going to be a real challenge for the pay package to be approved," Sacconaghi said.

CalSTRS CIO Chris Ailman told CNBC on Monday that he's voting "no" with his fund's 4.6 million shares of Tesla.

"This pay package is ridiculous, and I know he's mad, he'll say I'm absurd to say that. I'm sorry Elon. He wants to go to Mars, let's let him fly away," Ailman said. "The bottom line is this is a car company! This is not Nvidia. They do not make AI chips."

If Tesla does not receive approval for Musk's pay package, it could lead to a sell-off in the stock, Sacconaghi said. That's because Musk's attention might drift away from Tesla and toward his other companies and projects.

"If it's not approved, there certainly could be a further appeals process, but I expect the stock to potentially react negatively," Sacconaghi said. "There is a concern that Elon Musk would become less engaged. He's implicitly threatened that if he didn't have more control he would be concerned about developing AI at Tesla, so it's a significant vote."

While a "no" vote on Musk's pay package could hurt the stock in the short term, it would boost Tesla's earnings per share.

Sacconaghi estimated in a note that Tesla's diluted share count would decrease by about 9% going forward, which would increase the company's earnings per share by about 10%.

Sacconaghi rates Tesla at "sell" with a $120 price target, indicating potential downside of 32% from current levels.

Not everyone on Wall Street shares the view of the Bernstein analysts. Wedbush Securities analyst Dan Ivees said last week that the vote will likely see overwhelming approval from shareholders.

Read the original article on Business Insider