Tesla is set to join the U.S. S&P 500 stock index on Monday, which gives millions of investors a stake in electric cars and this company, Tesla.
Analysts say the biggest financial milestone (addition to the S&P 500 Index) is the confirmation of Elon Musk’s company’s good news series this year.
What Does It Mean For The Index?
The needs of its vehicles have been put up for this year despite the presence of the coronavirus pandemic.
But adding Tesla – the best-selling name on Wall Street – to S&P could mean a bumpier ride for investors in funds that track the index.
“If Tesla continues to be volatile as it has always been, then we can expect the index to be more volatile,” said Garrett Nelson, chief financial analyst at CFRA Research.
Legitimacy And Proof Of Work
Tesla has achieved its fair share since it was founded in California in 2003.
The company played a trick, seeing manager Elon Musk collide with the authorities on everything from self-driving technology to viral control.
Mr Musk has debated allegations of defamation, using drugs live on a web-based chat system and deciding on Twitter whether to hire an electric car maker or not.
Its shares have also endured ups and downs – although this year, they have seen the most of the first, rising by more than 700%, as the company seemed to put its production and financial challenges to the forefront.
They came up with about 6% of the new record on Friday night, as the S&P track fund bought an estimated $ 80bn (£ 60bn) stock before the company’s inclusion.
Tesla’s Position In The World
With more than $ 600bn invested in the market, Tesla now becomes the world’s most important car maker and the sixth most important company on Wall Street, after major infrastructure such as Apple and Amazon.
It says the difference is that it has sold part of rivals cars such as Toyota, General Motors and Volkswagen.
“I’m really amazed at where they are today – I think everyone is there,” said Nick Shields, a senior analyst at Third Bridge, who has been following the company for years.
Figuratively, he adds, the index adds, which tracks over 500 major US companies and measures them by market value, “is a major stamp of legitimacy”.
Entry To The Index
The rise in Tesla’s inflation rate this year has made Mr Musk one of the richest people in the world, with a net worth of about $ 150 million, behind Jeff Bezos of Amazon alone, according to Forbes’ billionaire.
Another rise, however, has nothing to do with Tesla’s trading prospects – instead it indicates an expectation that the company will join S&P, forcing funds following the index to buy shares.
After months of speculation, index manager S&P Dow Jones Indices announced the decision last month, after Tesla reported five quarters in a row for quarterly profits.
Since then, Tesla shares have exceeded about 60%.
It is expected to change some more Friday, as the index money bought Tesla and sold some hold to create a reasonable balance for its investors before the company’s launch on Monday.
Financially, “it’s very exciting because of the trade work we expect to do before the closing bell,” Mr. Nelson said. “The road comes with a cartoon and you’ll sit down and watch the show.
The Valuation – Rationale Or Not?
Tesla’s huge market share means it is expected to have a 1% index when it joins on Monday, replacing housing company Apartment Investment, which costs 0.02% of the index.
The company’s heavy weight should worry investors, says Vitali Kalesnik, partner and head of research for Europe at Research Affiliates, which believes Tesla shares are over-valued – and due to fall.
“If Tesla keeps going up, then it’s not a problem, but stocks just as well go down as they go up,” he says. “If this is a bubble – and we think it is – then investors would be quite disappointed.”
Tesla clearly has growth potential, he adds, but “the problem is the valuation.”
Mr Nelson says he thinks there is still room for company stocks to rise, given the expected increase in demand for electric vehicles, in part thanks to climate change policies adopted by future US president Joe Biden.
He predicts that Tesla’s share price could reach $ 750 in the next 12 months, from an estimated $ 695 closing on Friday.
“It’s one of the market’s best earnings growth stories at the moment,” he says.