Tesla to Be Added to S&P 500 Index -- 2nd Update

11/16/2020 | 07:39pm
Elon Musk

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

11-16-20 1938ET

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