Tesla is the number 1 most shorted stock on the market. However, Tesla has also gone up over 400% since the beginning of the year. Saying that it’s been a bad year to bet against the electric carmaker would be an understatement.
TSLA’s recent milestone is a massive one for the company and for capital markets in general. It has been announced that Tesla is going to be added to the S&P 500, expanding its investor base and officially solidifying its place in a league with some of the world’s largest companies, including Apple, Facebook, Amazon, and more.
The news broke on Monday afternoon and boosted Tesla 13.7% after-hours, following the long-awaited announcement.
What is the S&P 500?
In case you aren’t certain what the S&P is, let’s quickly cover it. The S&P is a stock market index that measures the performance of the 500 largest companies listed on all stock exchanges in the U.S.
As one of the most followed equity indices, it serves as a benchmark to evaluate overall U.S. stock market performance, as well as a guide for many investors looking to replicate the index’s returns over their investment horizon.
The S&P 500 is a market-cap-weighted index, meaning they evaluate overall performance by looking at market price multiplied by total number of shares outstanding. The higher the market cap, the more weight the company has within the index, by percentage. If a company on the index has a market capitalization of $100B, it will affect the overall index performance less than a company with a $200B market capitalization, and so on.
Simply put, the S&P 500 is generally accepted as the best gauge of stock market performance for U.S. large cap companies
How Will This Affect the S&P 500?
This is the exact question that the S&P is currently mulling over. With Tesla expected to join the index on December 21st, the S&P is considering rolling Tesla into the cap-weighted index in multiple tranches (aka, not all at once) so that the $400M market cap company doesn’t create (even more) short-term distortions in pricing.
The index passed on including Tesla back in September 2020 (when Tesla officially met all requirements) but now, it seems that the S&P is confident that TSLA’s valuation is stable (enough) for them.
The addition to the index will bring the S&P even higher no matter how it takes place, and the index recognizes the immense impact that its inclusion will have. It’s expected that index funds adjusting their holdings to match this change will initiate a $51B overall trade, with the S&P index stating that Tesla “consequently will generate one of the largest funding trades in S&P 500 history”.
How Will This Affect Tesla?
Becoming an S&P 500 company represents one of the largest milestones that an American company can hit and establishes immense credibility for Tesla. Its inclusion in the index will make it appear to be a safer investment than it otherwise would, for interested investors. Additionally, its inclusion in index funds will create stock price support through long-term holdings, which will continue holding the company through short-term dips and market downturns.
As the world’s largest automaker by valuation and one of the relatively smallest by production volume, many value investors and critics of the company have warned against adding them to the S&P at current levels. Given the inflated valuation, conservative investors who typically wouldn’t take on the risk of owning Tesla are critical of the index’s willingness to accept them in their current state; however, the S&P’s decision to do so speaks magnitudes to their future-looking confidence.
In the short-term, this move could push the Tesla stock price even higher, as has happened in the past. When Yahoo was added to the S&P 500 in 1999, it surged 64% over 5 days, directly following the announcement of its upcoming inclusion to the index. While we are in no way stating that this will happen with Tesla and the specific company situations are different, we do acknowledge that a continued rally is a possibility. As the company solidifies its position as a battery manufacturer over the coming years and continues to develop more financially accessible electric vehicles, its inclusion in the index and preceding four quarters of profitability will only serve to bolster bull cases for the stock.
As the company solidifies its position as a battery manufacturer over the coming years and continues to develop more financially accessible electric vehicles, its inclusion in the index and preceding four quarters of profitability will only serve to bolster bull cases for the stock.