Tesla Joins the S&P 500 Today

How We Got Here

Today is the day Tesla (TSLA) joins the S&P 500. The EV maker’s shares climbed over 730% this year and it currently has a market value of more than $647 billion.

The company’s road to joining the index has had some twists and turns. Investors hoped Tesla would earn a spot in the S&P 500 back in September because it reported a fourth consecutive profitable quarter—an important requirement for admittance into the broad based benchmark. Tesla did not make the cut for the index’s third quarter rebalance. Then in late November it was announced that Tesla would finally be added to the S&P 500 on December 21, which is today.

Why This Addition to the Index Is Different than Most

Tesla will be the largest company ever added to the S&P 500. Right away it will be the sixth most valuable company in the index, with only Apple (AAPL), Microsoft, Amazon (AMZN), Google (GOOGL), and Facebook (FB) ahead of it. Normally when a new company is added to the S&P 500, it is swapped for another firm of a similar size. But there is no stock that the S&P 500 could conceivably remove to offset Tesla’s entry into the index. When Tesla is added, it will account for about 1.52% of the index.

For this reason, the index considered adding Tesla shares in phases to avoid dramatic changes in the market, but eventually it was decided that Tesla would be added all at once.

Freaking Friday

Last week traders were preparing for a frenzy on Friday ahead of Tesla’s debut on the S&P 500. Tesla shares ended up 6% higher on the final day of the week—which is a significant leap, but also not the rally that some expected.

Tesla skeptics say the company’s shares may be in the midst of a bubble which could soon pop. Tesla could face much tougher competition in the coming years as the EV industry becomes more crowded.

On the other hand, bullish investors say Tesla could produce $10 billion in net income by 2022, which is up from the $226 million it has earned over the past year. These investors also see the company’s inclusion on the S&P 500 as an important sign that the auto industry and Wall Street take Tesla seriously. Today both critics and fans of Tesla will be eager to see how the company performs during its first day as a member of the S&P 500.

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