- This summer, Tesla surpassed Toyota to become the world's most valuable auto company, and its current market value is close to $270 billion.
- The inclusion of Tesla in the S&P 500 index is not only symbolic but may also have a significant impact on investors.
- However, joining the S&P 500 index does not necessarily mean an increase in stock prices.
Tesla will be officially included in the S&P 500 index, per an announcement on Monday. This change will take effect in more than a month from now, which is the Monday of December 21. When the market opens that morning, Tesla’s stock will be on the S&P 500 index— a milestone for the electric car manufacturer.
This summer, Tesla surpassed Toyota to become the world’s most valuable auto company, and its current market value is close to $270 billion. Until now, however, it has missed the S&P 500 index because of its lack of stable profitability. At this point, a company needs to achieve positive profits for one year to qualify for entry.
In late July, when Tesla reported its unexpected profitability in the second quarter, the original situation also changed. This means that Tesla has achieved four consecutive quarters of profitability, breaking in to the S&P 500 index, the last obstacle.
Although the index did not offer Tesla an olive branch during the constituent stock changes in September at the beginning, some investors believe that Tesla continued to turn losses into profits in the third quarter.
Despite this, Tesla’s market value has soared to approximately $387 billion, and will become one of the largest constituent stocks in the S&P 500 Index. Such a dominant weight may expose the index to the risk of structural imbalance.
Therefore, S&P officials are considering the inclusion of Tesla’s shares in two batches, with plans to start on December 21. The S&P 500 Index’s announcement stated:
“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.”
The S&P 500 Index includes 500 of the largest listed companies in the United States, from Apple and Berkshire Hathaway to Netflix. In the eyes of the majority of investors, the index has always been a popular choice, and they will buy various funds according to the trend of the index.
In the eyes of professional financial planners, the index is also an important barometer of market performance. This means that the inclusion of Tesla in the S&P 500 index is not only symbolic but may also have a significant impact on investors, because index funds and other portfolio managers will follow the pace of the index and buy Tesla Stock.
These snap-ups may further boost Tesla’s stock price, just as other companies that have joined the S&P 500. Earlier in 2005, when there was news that Amazon would join the index, its stock price rose by 5%. One of the rookie companies, Bio-Rad Laboratories, has risen 13% since it was included in the S&P 500 Index in June.
However, joining the S&P 500 index does not necessarily mean an increase in stock prices, as in the share prices of the other two companies that joined the index in June, Teledyne Technologies, and Tyler Technologies.
The increase was less than 3%, which was lower than the nearly 9% increase in the S&P 500 itself during the same period. After the announcement on November 16, Tesla’s stock price still jumped more than 10% in after-hours trading.
Tesla has always been one of the best-performing stocks in 2020, leading some analysts to blame the S&P 500’s recent poor performance on the fact that it did not include Tesla.
This is also based on facts: after the inclusion of Tesla, the Nasdaq Composite Index recovered from the sluggish stock market in 2020 at the beginning of May, and its post-recovery growth reached a new high in June.
It took a month for the S&P 500 Index to barely reach the equilibrium point and finally set a new high in August (the performance has continued to improve since then). The same is true for investors who are more inclined to short Tesla or are uneasy about Tesla’s sky-high valuation.
Tesla announced in August that it would split its stocks to ensure that current holders can receive a dividend of five profits, thereby reducing the price of each stock. This news made its stock price soar because investors believed that this change might also stimulate more people to buy the company’s stock, thereby further pushing up the stock price. If these long investors are right, more investors will soon become Tesla shareholders.