S&P Dow Jones Indices announced on Monday Tesla would join the S&P 500 index, WSJ reports.
How We Got Here: “Inclusion in the benchmark that gauges the U.S. stock market requires an accumulation of four consecutive quarters of net profit. Tesla has strung together five for the first time in its history.”
“Being added to the S&P 500 is the latest milestone for the company which has enjoyed, unexpectedly to many, a marked ascent this year, despite the challenges of the coronavirus pandemic.”
- Tesla hit 140,000 deliveries in Q3 and is on pace to reach 500,000 on the year.
- Thanks to production from its Shanghai factory, Tesla turned a Q3 profit of $331 million. It also was buoyed by $397 million in regulatory credits during the third quarter.
How The Stock Moved: Shares rose 14% in after-hours trading on the news. Tesla’s stock has quadrupled this year, and the EV company is now the world’s largest carmaker by market valuation, bigger than Toyota and Volkswagen.
Tesla’s addition to the index is a clear sign of the car industry’s shifting mindset toward electric vehicles. Most rivals are following suit and developing their own EV competitors.
Wait And See: The company Tesla is replacing will be named later, and fund managers will likely add the stock over a transition period because of the stock’s large size.
- Joining the S&P 500 typically results in a stock rally, but not long-term gains. Companies added between 1973 and 2018 “usually fell behind the S&P a year after inclusion,” according to Ned Davis Research.
But some analysts worry Tesla’s inclusion generates too much risk.
- “I think Tesla’s addition to the S&P 500 might be a catalyst for a lot of large investors to dump the stock and take gains,” said David Trainer, CEO of New Constructs and a long-time Tesla Skeptic.
As a long-term Tesla ($TSLA) bull, I currently have a $450-500 fair value price target on the stock, so this is a nice, but expected, piece of news for those of us that own Tesla stock.
The volatility of Tesla, its wide distribution of outcomes, and potential automotive competition preclude me from making $TSLA a core position, but holding it as a small piece of your portfolio can add long-term innovation-driven value if you believe in Elon Musk and autonomous driving.