Tesla to Be Added to S&P 500 Index -- 2nd Update
November 16 2020 - 7:53PM
Dow Jones News
By Heather Somerville
Tesla Inc. Chief Executive Elon Musk has taken another step to
turning the Silicon Valley electric-vehicle maker into a mainstream
car maker, parking the company in the S&P 500 index.
It marks a milestone for the company that over the course of its
17 years has sought to overcome cash flow problems and defy
skeptics from Wall Street and Detroit.
S&P Dow Jones Indices on Monday said Tesla would join the
index on Dec. 21.
The move is expected to galvanize the company's bullish
investors who have propelled its soaring share price and coincides
with Wall Street expectations of Tesla's first full-calendar year
of profit in 2020. The company has posted a profit in the first
three quarters of the year despite the pandemic that led local
authorities in California to order the company to temporarily close
its lone U.S. car plant.
Inclusion in the benchmark that gauges the U.S. stock market
requires an accumulation of four consecutive quarters of net
profit. Tesla has strung together five for the first time in its
history.
"It's the cherry on top of a very successful year for Musk,"
said Toni Sacconaghi, an analyst with Bernstein Research. "It's
probably the ultimate symbolic vindication for Elon Musk that he is
being recognized by this significant financial index."
The company's third-quarter profit was a record $331 million,
propelled by production from its Shanghai factory, where Tesla
benefits from cheaper labor, and strong demand for its
more-affordable Model 3 car. Tesla was buoyed by $397 million in
regulatory credits in the third quarter which helped tip it into
profitability.
The inclusion elevates Tesla's profile among public market
investors and validates what was once a niche and highly
unprofitable Silicon Valley company. Tesla also has more broadly
changed the car industry's mind-set around electric cars and
ignited a race toward electrification, with most rivals now
offering or introducing rival products.
Tesla will replace an S&P 500 company that will be named
closer to the effective date.
Fund managers said they expect the S&P will likely add Tesla
in separate tranches over a period of a couple of days because of
the large size of the stock addition. Many large fund managers were
already tracking Tesla because of its large market capitalization
and run-up in share price.
Being added to the S&P 500 is the latest milestone for the
company which has enjoyed, unexpectedly to many, a marked ascent
this year, despite the challenges of the coronavirus pandemic. Mr.
Musk said he tested positive for the virus last week. On Monday, he
said on Twitter he had no symptoms in recent days but was
fatigued.
Tesla in the third quarter delivered a record nearly 140,000
cars and is on pace to hit a target of 500,000 vehicle deliveries
for the year, a goal not long ago deemed implausible.
Tesla shares jumped more than 14% in after-hours trading
following news it would join the index. Shares in the company have
quadrupled this year. It became the world's largest car maker by
market valuation, despite producing far fewer vehicles than rivals
such as Toyota Motor Corp. and Volkswagen AG.
Inclusion in the S&P typically brings a rally for a
company's stock, though the gains don't necessarily last long.
Stock performance for companies added to the index between 1973 and
2018 usually fell behind the S&P a year after inclusion,
according to Ned Davis Research.
The company was overlooked for inclusion in the index in
September, briefly halting Tesla's dramatic share price increase.
The index didn't elaborate on its reasoning at the time, but some
analysts pointed to the company's heavy reliance on regulatory
credits to bolster its bottom line.
Skeptics remain, however, and some analysts warned that Tesla's
inclusion in the S&P brought risk to the entire index. David
Trainer, chief executive of investment research firm New Constructs
and a longtime Tesla skeptic, pointed to Tesla's steep competition
in China and Europe.
"S&P is making a big mistake and adding lots of downside
risk to the index by including Tesla," Mr. Trainer said. "I think
Tesla's addition to the S&P 500 might be a catalyst for a lot
of large investors to dump the stock and take gains."
Tesla didn't immediately respond to a request for comment.
Write to Heather Somerville at Heather.Somerville@wsj.com
(END) Dow Jones Newswires
November 16, 2020 19:38 ET (00:38 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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