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Can Tesla Pull a Yahoo on a Possible S&P 500 Inclusion?

Mohit Oberoi
Author: Mohit Oberoi

Last Updated: July 10, 2020

Tesla shares price, that’s up over 500% over the last year, could rise even further if it is included in the S&P 500 just like Yahoo shares rallied 64% in 5 trading sessions in 1999 on news of inclusion in the index.

Tesla share has been on a fire since last October 2019. It has risen 29% in July and is now up a whopping 233% for the year. Other electric vehicle stocks have also rallied and NIO, hailed as China’s Tesla is up 287% so far in 2020.

Tesla stock chart

After the recent surge, Tesla’s market capitalization surpassed Toyota Motors, which is the world’s largest carmaker. While Tesla’s valuation is making some analysts apprehensive and last month Goldman Sachs downgraded the stock, it has continued to move higher.

Tesla would be eligible for inclusion into the S&P 500 if it posts a profit in the second quarter. It has posted a net profit for three consecutive quarters and a profit in the second quarter would make it eligible for inclusion in the prestigious index.

Tesla’s CEO Elon Musk dropped hints about the company’s second quarter performance in a leaked internal email in which he said “breaking even is looking super tight.” That said, Musk did not specify whether he is pushing for breakeven on the net profit or some other metric.

If Tesla gets included in the S&P 500, the ETFs and funds tracking the index would have to necessarily buy the stock. The assets under management of funds that track the S&P 500 are above $4.4tn according to S&P Dow Jones.

“Even if you don’t like Tesla and you think it’s overvalued, the fact that it is going into the index would mean trillions of dollars would have some kind of position,” said Jim Bianco, head of Bianco Research in Chicago. He added, “As part of their benchmark, portfolio managers would not be able to ignore it.”

In 1999, Yahoo which has a market capitalization of $56 billion, rallied 64% in a span of 5 days between the news of its inclusion in the index and the actual inclusion on December 7.

“The lesson learned from Yahoo was that when you have an up and coming issue that may possibly go into the index, you should already own a little of it,” said Howard Silverblatt, a senior index analyst at S&P Dow Jones. He added, “If you had to get into that stock, you were paying a heck of a premium compared to owning it a week earlier.

Meanwhile, Tesla is the most shorted stocks on the NYSE, and short-sellers have bet $19bn that the stock would fall.

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Mohit Oberoi

Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.