Historic Milestone for Tesla and S&P 500

Historic Milestone for Tesla and S&P 500

by Gill D on November 17, 2020

At long last, Tesla is joining the S&P 500. On Monday, the S&P Dow Jones Indices announced that the EV auto manufacturer is going to be added to the index on 21 December. When news was released, Tesla shares increased more than 13%. This has been long awaited as Tesla is definitely valuable enough to be included in the S&P 500. Up till now, there were a few reasons that has kept Tesla off this exclusive list. The make-up of the S&P 500 is defined by the Index Committee who analyzes quantitative and qualitative factors.

In September this year, Tesla was expecting to join the S&P 500, but the company was snubbed, which was disappointing news for Tesla stockholders and fans alike. Even though the EV giant met the criteria, the company was not selected. Part of this criteria was that companies had to report four consecutive quarters of profit as determined by U.S. generally accepted accounting principles (GAAP).

Tesla already reported its fifth consecutive quarter of profit on third-quarter revenue of $8.77 billion, and the company announced its delivery of 139,300 vehicles during the third quarter, which is a record for Tesla. The Index Committee meets quarterly basis to rebalance and assess the index, which means companies can be included or even removed from the S&P at any given time. Because of this market-moving process, the process is strictly managed, and companies don’t necessarily get advance warning if they’re earmarked to be added. Adding Tesla to the S&P 500 is slightly unique because it will be the largest company ever added because it has a market cap above $380 billion. And Tesla stock has more than quadrupled in value during this year.

With Tesla’s value being added to the S&P 500, that means there will be $11.2 trillion in assets benchmarked to the S&P 500. In a statement by S&P, they said:

“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.”

Dan Ives who is an analyst at Wedbush Securities, remarked “This is another major feather in the cap for Tesla bulls joining the S&P 500. It speaks to the sustained profit trajectory that Tesla is now finally getting into this elusive club after much noise on the Street.”

Tesla’s stock market value was sitting at $387bn when trading closed yesterday. Because of its high value it could possibly cause some volatility in the index when Tesla joins the S&P 500. The three companies Etsy, Teradyne and Catalent that added to the S&P 500 in a September (when Tesla was excluded) are only worth a combined $50bn. S&P said it will look to investors for feedback on whether to add Tesla to in one instalment on 21 December or rather do it in two tranches ending on that day.

This is a momentous milestone for the electric car company and great news for Tesla boss, Elon Musk who has had quite a bumpy year, including his recent COVID-19 diagnosis. It seems the EV CEO is still in good spirits and seemingly healthy with his recent update on his condition:

"I’m ok, thanks for asking. No symptoms for past few days, apart from fatigue. Unless something changes, would have to say that it simply felt like a mild cold."

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