Tesla Insiders Are Dumping the Stock. Is It a Red Flag or a Red Herring?

Tesla (NASDAQ: TSLA) stock has been under enormous pressure in recent weeks. After surging in the aftermath of the U.S. presidential election on hopes that CEO Elon Musk's cozy relationship with President Donald Trump would lead to a windfall for the electric vehicle (EV) company, the stock price has been on a downward slide since mid-December, falling nearly 45%.

Musk's outspoken views on multiple issues as well as his work on a project for the Trump administration called the Department of Government Efficiency (DOGE) has damaged his reputation and has tied the Tesla brand up in political controversy. In some cases, it has resulted in vandalism at several Tesla dealerships and charging stations. Additionally, Tesla vehicle sales in Europe have plunged 43% in the first two months of the year, according to registration data.

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The stock sell-off prompted Musk to hold an all-hands meeting recently to reassure employees and tell them not to sell their shares, touting the company's innovations in artificial intelligence (AI), autonomous vehicles, and robotics.

While Musk is telling his employees to hold fast, other Tesla insiders have been dumping the stock amid the roller-coaster ride in recent months and the controversy surrounding Musk and the company.

Image source: Getty Images.

Tesla insiders hit the exits

Investors often flag insider sales as evidence that something is wrong with a stock, but not all insider sales are created equal. Often, these sales are part of predetermined program, known as a 10b5-1, designed for an executive or a director to offload stocks at prearranged intervals so they can diversify and bring in liquidity as needed. Since those sales are predetermined, they shouldn't be seen as motivated by insider information or the performance of the business.

Tesla has reported several 10b5-1 insider sales in recent weeks, including by CFO Vaibhav Taneja and Director Robyn Denholm, which investors can safely ignore.

However, there have also been several unplanned sales, or those that aren't part of the 10b5-1, that are more likely to be driven by underlying issues with the company.

The insiders who have sold the stock in recent weeks include:

• Taneja, who sold 2,672 shares on March 6.
• Director James Murdoch, who was CEO of 21st Century Fox from 2015 to 2019 and is the son of Rupert Murdoch, sold 54,776 shares, or $13.2 million worth of the stock.
• Director Kimbal Musk, the brother of Elon Musk, sold 75,000 shares on Feb. 6 for $27.6 million.

Of course, insiders sell stock for all sorts of reasons that have nothing to do with the company's performance, including that they need the money for something else, but the CFO and two directors choosing to sell the stock in the last two months as Tesla stock spiraled could also reflect the business's greater problems. It also could show a lack of confidence in the business from management, or at least those three insiders.

Insiders are also forbidden by law from trading on material non-public information, such as knowledge of an upcoming acquisition, so investors shouldn't assume that those sales are based on insider information, though executives and directors are privy to insights about the company that retail investors don't have.

Is Tesla in trouble?

Overall, I think the news surrounding Tesla is more concerning than just the insider selling would imply. I also think it undermines Musk's plea to his employees to hold their stock when his closest deputies are selling theirs.

At this point, while Tesla seems like it's in a crisis, it's hard to know what's meaningful and what's exaggerated. The plunge in European sales certainly seems like a problem, while the acts of vandalism could stop and are likely the work of a small group of people.

We'll get a clearer sense of where the business is headed when the company reports first-quarter deliveries on April 2. Analysts have cut their delivery estimates to 355,000, or a 15% drop in the first quarter, which would be well below Musk's goal of a 20% to 30% increase in vehicle sales this year. A double-digit decline would seem to confirm the contention that the company is in crisis, even if Tesla meets analyst estimates.

Meanwhile, Tesla seems to be increasingly valued based on its progress toward an autonomous future, which is expected to take a big step later this year when it launches a robotaxi network in Austin.

Given the high valuation even amid the company's challenges, it's not surprising to see insiders cashing in their shares. At this point, the insider sales don't seem like a red flag, but Tesla has a lot riding on its first-quarter report. Investors will get a clearer sense of how much of an impact Musk's involvement with the Trump administration and the related brand crisis is having on the business. If it's worse than expected, Tesla stock is likely to plunge.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.