As the largest company to ever join the index, Tesla’s S&P 500 debut is expected to set $100 billion in motion and cause headaches across Wall Street, WSJ reports.
A Quick Refresher: After Tesla announced its fifth consecutive profitable quarter, overcoming cash flow issues and defying skeptics, S&P Dow Jones Indices announced the electric vehicle maker would join the S&P 500 on Dec. 21.
- Tesla stock has soared more than 40% since mid-November. It’s grown 7x on the year alone. Meanwhile, the S&P 500 is up 13% this year.
- Tesla is expected to make up at least 1% of the index and be the sixth-largest company in the S&P 500 at its current value.
How It Will Happen: Index funds will have to offload in smaller stocks ($60 billion to $80 billion in market cap) already in the S&P 500 to pick up shares of the EV company. In total, Goldman Sachs said in a recent note, “Actively managed funds benchmarked to the S&P 500 are projected to buy $8 billion of Tesla shares.”
Here’s The Problem: Putting aside Tesla’s high volatility, the $555 billion behemoth is the largest company ever to join the index. As a result, S&P “polled big investors polled big investors on whether they would prefer adding Tesla’s weight all at once on Dec. 21 or split over two trading days in December — an unprecedented move.”
- The consensus appears to favor the two-day option, accounting for Tesla’s size and volatility of the company and a Covid-19-sensitive market.
The Final Word: How the stock gets added falls on S&P, which should announce the “results of the consultation” Monday. Industry experts expect demand for Tesla to heat up even more based on inclusion to the index.
- If demand fades ahead of inclusion, however, Tesla’s shares could sink dramatically. Both Yahoo and Qwest Communications serve as cautionary tales, peaking upon inclusion to the S&P 500 and no longer trading today.
Tesla ($TSLA) has ripped past my target range of $450-500 and has, by all accounts, proven itself to be more unstoppable than I thought. The valuation continues to look more and more stretched, which is why it’s not a core position on the Big Board, but I would be remiss if we sold all our $TSLA shares. Sometimes, it’s nice to be along for the ride, even if not in large size.