CEO Elon Musk Just Bought Nearly $1 Billion in Tesla Stock. Should Investors Follow Suit?

Key Points

• Tesla stock recently got a boost when it launched its long-awaited robotaxi service.

• The board has proposed a new, generous incentive package for CEO Elon Musk.

• Musk responded by purchasing a hefty amount of Tesla stock.

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The past few years have been a wild ride for Tesla (NASDAQ: TSLA) investors. After climbing to a new all-time high in mid-December, the electric vehicle (EV) leader suddenly shifted into reverse as weak EV sales in its three largest markets punished the stock, which spent the next four months careening lower.

Since bottoming out in early April, Tesla has experienced a remarkable comeback, gaining 76% (as of this writing). Excitement about the potential for the company's robotaxi service fueled most of the move higher. More recently, however, CEO Elon Musk turned heads when he bought a sizable amount of Tesla stock, adding millions of shares to his coffers.

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That purchase sparked excitement among Tesla investors. After all, if the chief executive is loading up, is it time for investors to follow suit?

Let's see what's driving the stock higher and dig into the details of Musk's purchase.

Image source: Tesla.

What's driving the stock higher?

On June 22, Tesla officially announced the long-awaited debut of its robotaxi service. The event, held in Austin, Texas, offered test rides to select members of the Tesla faithful and a number of social media influencers from X (formerly Twitter) -- some of whom livestreamed their rides for good measure.

The pilot program is ongoing, with an estimated 10 to 20 Model Ys ferrying riders to their destinations, hailed using the Uber app. Musk has previously stated that he expects "open access" to the service to begin sometime in September.

While a host of automakers entered the self-driving car race over the years, Tesla and Alphabet's Waymo are the only two that have launched robotaxi services. Cathie Wood, founder and CEO of Ark Invest, estimates that by 2030, there will be roughly 50 million robotaxis operating globally, with Tesla controlling 50% of the market.

Even if that estimate turns out to be ambitious, it's easy to see why investors are excited.

By the numbers

Earlier this month, Tesla's Board of Directors took the extraordinary step of asking shareholders to approve a new $900 billion incentive package for Musk. The deal is contingent on Musk achieving "extraordinary financial returns." These include raising Tesla's market cap, first to $2 trillion (up from $1.3 trillion today) and eventually to $8.5 trillion. He would also have to boost Tesla's earnings before interest, taxes, depreciation, and amortization (EBITDA), resulting in operating profits of $400 billion, up from $17 billion in 2024.

In a regulatory filing with the Securities and Exchange Commission (SEC) that dropped on Friday, Musk signaled his enthusiasm for the plan. The enigmatic chief executive bought more than 2.5 million shares of Tesla stock, priced in a range of $371.38 and $396.54, spending just short of $1 billion in all on the purchase. Added to the 410 million shares Musk already owned, and using the stock's closing price on Friday, Musk's stake in Tesla has risen to more than $163 billion.

Should investors follow suit?

There's a well-known axiom on Wall Street, popularized by legendary investor Peter Lynch: "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise."

Given Musk's huge vote of confidence in Tesla's future potential, it might seem like a no-brainer to follow suit. More broadly, however, the answer will depend on the individual investor, as there's simply no one-size-fits-all answer.

There's no doubt Tesla is facing challenges in the electric vehicle market. In the second quarter, auto sales revenue of $16.7 billion fell 16%, marking the third consecutive quarter of year-over-year sales declines. Since this is Tesla's bread and butter, total revenue of $22.5 billion slumped 12%. As a result, adjusted earnings per share (EPS) of $0.40 fell 23%.

An unfortunate side-effect of the decline in Tesla's profits has been a commensurate rise in its already pricey valuation. The stock is currently selling for 237 times earnings and 169 times next year's expected earnings, so it isn't for the faint of heart.

As a general rule, I don't make investing decisions based on whether the company's management is buying or selling. That said, if Tesla can pull off a coup in the robotaxi market (and that's a big if), it could become one of the most successful companies in a generation.

To me, that's worth sticking around to find out.

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Danny Vena has positions in Alphabet and Tesla. The Motley Fool has positions in and recommends Alphabet, Tesla, and Uber Technologies. The Motley Fool has a disclosure policy.