What Tesla Brings to the S&P 500

Monday’s announcement that electric vehicle maker Tesla Inc. (NASDAQ: TSLA) will be added to the S&P 500 index on December 21 sent the automaker’s stock soaring again. As if the stock really needed an excuse.

The move had been expected earlier, after Tesla had reported four consecutive profitable quarters, one of the requirements for inclusion on the index. It took a fifth consecutive quarter to clinch Tesla’s spot, however.

The second sentence of the announcement may offer a clue to why the delay: “Due to the large size of the addition, S&P Dow Jones Indices is seeking feedback through a consultation to the investment community to determine if Tesla should be added all at once on the rebalance effective date or in two separate tranches ending on the rebalance effective date.”

Tesla’s market cap of around $435 billion (as of Monday morning) puts it among the top 10 index stocks by market cap. That puts Tesla between Johnson & Johnson and Berkshire Hathaway as the eighth largest on the index.

Adding that much weight (about 1% of all 500 stocks) to the index is not a trivial matter. S&P Dow Jones Indices recognized that it couldn’t replace just one S&P component with Tesla, which sports a market cap equal to that of the 60 smallest index components, according to a Bloomberg report.

With about $11 trillion worth of assets either tied to or benchmarked to the index, passive investment funds that track the S&P 500 probably don’t want the index to turn into a Tesla tracking stock.

Not every investment firm sees the addition of Tesla to the index as a plus. David Trainer of investment firm New Concepts told the Wall Street Journal, “S&P is making a big mistake and adding lots of downside risk to the index by including Tesla. 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.” Trainer is a long-time Tesla bear.

On the other side of the Tesla coin, Gene Munster, a Tesla bull, and David Stokman of Loup Ventures wrote last month that the company expects to meet its forecast of 500,000 automobile deliveries for 2020, including about 181,000 in the fourth quarter. Other positives include gross margin in the third quarter of 23.7%, up five points sequentially, and introduction of the Model Y in Asia and Europe next year.

Tesla’s energy generation and storage segment revenues rose by 44% year over year in the third quarter. According to Munster and Stokman, that accounted for about 7% of total revenues and they believe that the segment eventually could generate a quarter of Tesla’s revenue. The risk is that the automotive sector will be growing just as fast.

Tesla stock traded up by as much as 14% in the after-hours session Monday and cooled off a bit to a gain of around 9.7% Tuesday morning. The stock was trading at $447.86, in a 52-week range of $65.42 to $502.49. The price target on the stock is $349.79.

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