Tesla S&P 500 Inclusion
It was a matter of time.
Readers,
Earlier this week S&P Global announced that Tesla would be added to the S&P 500 index, which has been a point of discussion since Tesla reported 4 straight quarters in profitability (Q2, 2020). Since then, Tesla solidified it’s probabilities of being added by presenting a profitable Q3 and something that the S&P committee could no longer ignore. Tesla is set to become the highest valued company by market cap to be added to the S&P 500 index on December 21st.
Now the question remains, how much value will be directly added to Tesla’s market cap. This is a difficult question to answer and there are some market dynamics that could make this addition very interestinG. There are many benchmark funds that track the S&P 500 as well as the indices themselves. In total, they represent $11.6 trillion dollars that are directly tied to the S&P 500 index. These funds will be under obligation to purchase Tesla shares in order to keep their correlation with the index. However, current Tesla shareholders are under no obligation to sell their shares. This means that we could likely see further upside in the stock price as these funds attempt to finalize their purchases.
In addition, we are seeing many of wall streets most bearish analysts turn bullish on the stock. Adam Jonas from Morgan Stanley increased his Tesla price target to $540 from his underweight rating of $180. Jonas has been a Tesla bear for ever, until now. This is a great example as to how wall street analysts are not reliable sources of research or information since they operate under the agendas of their respective shares. Jonas will receive continue getting paid by his employer regardless of Tesla’s actual performance. We see the exact same thing with Gordon Johnson who still believes Tesla will got to $0 . If you are relying on analyst reports to drive your investment decisions, I strongly suggest you change strategies.
Another implication of the Tesla addition is that I would expect to see lower volatility in the stock over time. Once in the index, the years of 500% gains are likely to be over. This does not mean Tesla will not continue gaining value over time but the 10-20x returns are likely in the rear view mirror. As an early investor, I built a solid position in the company and plan on keeping all my shares. However, my focus is now set on finding future 10-20x opportunities. Tesla is officially a winner.