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Would Tesla’s inclusion in S&P 500 drive its share price wild?

Electric car company Tesla’s [TSLA] share price has seen a meteoric rise over the past year and for the year to date (through 29 May), the company’s share price is up 99.6% at $835.

This share price rally has prompted further speculation on its inclusion into the S&P 500. Such a move would place the company among the ranks of giants such as Amazon [AMZN], Apple [APPL], Facebook [FB], Alphabet [GOOGL] and JP Morgan [JPM]

For all equities, inclusion in the S&P 500 depends on certain criteria, such as liquidity, a market cap above $8.2bn (Tesla’s share price lends the stock a current valuation of over $150bn) and US headquarters. The final box to tick is that the sum of the most recent four consecutive quarters’ earnings should be positive, as should the most recent quarter. This could be an issue, as Tesla has struggled to maintain consistent profitability, and the coronavirus has produced notable headwinds for the auto industry.

The Nasdaq-listed stock has turned a profit in the previous three consecutive quarters, so its Q2 quarterly results, due in July, will be the tipping point. If it can produce a profit in Q2, it is primed for inclusion. In April, Tesla reported a Q1 profit of $16m, with revenue of $6bn. Analysts estimates for the quarter had varied wildly. If this were to come to pass investors, already awed by recent share price performance, could be in for another show.

 

 

That S&P 500 clout

The S&P 500 is considered to be a leading economic indicator in the US, and a certain level of prestige is attached to the companies that join it.

Research shows that when a stock is included in the S&P 500, on average, its earnings and market value increase. The average annual return for the index, since its inception and up to 2019, stands at around 10%.

Tesla is tantalisingly close. Even with the coronavirus pandemic weighing down on the auto industry, the Elon Musk-fronted electric car company’s share price has weathered uncertainty fairly well. It is a top performer among the Nasdaq 100 stocks, and at recent May peak, following the market slump, its share price was more than 230% higher than May 2019.

230%

Tesla's share price rise between May 2020 peak and May 2019

  

Even at its lowest point, when the market crashed in March, Tesla’s share price was 34% higher than a year before. Compared to other car manufacturers, who are requesting state bailouts, Tesla is sitting comfortably.

 

“Too high imo”

Tesla’s rise has been remarkable, with even Musk tweeting that “Tesla stock price too high [in my opinion]” on 1 May. Musk has previously been reprimanded by the US Securities and Exchange Commission for tweeting about the company’s share price, although it declined to comment on this incident.

Since the coronavirus-related crash, Tesla’s share price has steadily regained its value. In the year up to 28 May, the stock is currently up 90%.

“Tesla stock price too high [in my opinion]” - tweet from Elon Musk

 

But while the share price has been rising, Musk’s business decisions have also been put under the microscope. He has stirred controversy, threatening to move his California-based factory due to state-imposed coronavirus lockdowns. Tesla factories in the US closed 23 March due to the pandemic, but have since received the green light to reopen, subject to certain health and safety requirements.

The Tesla factory in Shanghai was also closed for a short period while China tried to stem the spread of the COVID-19 outbreak. Musk raised $2bn in a stock offering in February, as investors looked on to see the extent of coronavirus-related damage.

 

What’s expected of Tesla?

Catherine Wood, CEO of Ark Investment Management, had previously predicted Tesla’s share price would reach $7,000 by 2024. She has cut her prediction slightly since the pandemic, but remains bullish at $6,800. Her target is based on the idea that Tesla will branch out into services such as autonomous cars.

The consensus among analysts polled by CNN Business is to hold Tesla stock, with 14 analysts giving this recommendation. Otherwise, investors are split, with an equal number (eight) recommending it as a buy and a sell.

Analysts polled by MarketWatch also recommend to hold the stock. The 33 analysts hold an average price target of $641.27, a decrease of 23% on 29 May’s closing price.

Investors have good reason to be cautious about an equity, particularly in an industry that is floundering, however, there is a case to be made for buying Tesla stock before it — potentially — ascends to the S&P 500, to hold for the long run.

 

Market Cap$163.344bn
EPS (TTM)-4.77
Operating Margin (TTM)0.62%
Quarterly Revenue Growth (YoY)-7.60%

Tesla share price vitals, Yahoo Finance, 4 June 2020

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