The Great Tesla Debate
After Four Profitable Quarters, Tesla Meets Index Requirements
Tesla (TSLA) could be on its way to joining the S&P 500. The electric vehicle maker’s shares have more than tripled this year, and its market value hit $295 billion. Additionally, the company has been profitable for four straight quarters for the first time in its 17-year history, meeting a requirement for joining the S&P 500.
It’s unusual for a company with a market capitalization as high as Tesla’s not to be included in the index. If it were to join, Tesla would make up about 1% of the S&P 500, and would be the largest company by market value ever to enter the index.
An eight-person committee decides which companies are eligible for the S&P 500. The index rebalances once per quarter, but the committee can make adjustments at any point. Already, the company has made ten swaps this year, bringing on Domino’s Pizza (DPZ) and Paycom Software (PAYC), while shedding Harley-Davidson (HOG) and Macy’s (M).
Bear Investors’ Perspective
Investors have strong disagreements about Tesla’s future. Bear investors, those who predict that a stock or industry will decline, argue that Tesla stock prices have ballooned and will eventually pop.
Some investors also say that Tesla is only profitable right now because it generates so many tax credits. Because Tesla’s cars have zero carbon emissions, governments reward it with regulatory tax credits, which it then sells to competing carmakers. Tesla’s second-quarter revenue got a $428 million boost from these tax credits, which helped the company eke out a profit.
Bull Investors’ Perspective
Bull investors, meaning those who think a stock or industry is positioned to rise, believe that Tesla stock will continue to climb.
Some of these investors are thinking ahead to the US presidential election. Former Vice President Joe Biden recently announced a $2 trillion plan to address climate change. The proposal includes funding for 500,000 EV charging stations and for research on EV batteries, which would benefit Tesla and fellow EV companies like Nikola Corp (NKLA) and Aptiv PLC (APTV).
Just in July, Tesla’s shares have rocketed 47.5% while the S&P 500 has only gone up by 5.7%. Many bullish investors believe the company will get an additional boost from being added to the S&P 500, but this is somewhat hard to predict. Of the 10 companies that joined the index last year, five have been ahead of the index and five have underperformed.
Investors, both bull and bear, will be closely watching to see if Tesla is added to the S&P 500—and what the eventual decision means for the trajectory of its shares.
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