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  • Date of publication: 22 December 2020
  • 114
  • Tesla will enter the S&P 500 index, regardless of criticism


    Tesla will join the US benchmark S&P 500 on Monday, giving millions of investors a stake in the electric vehicle maker.

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Analysts point to some good news for Elon Musk's firm.

Demand for his cars has been robust this year despite the coronavirus pandemic.

But adding Tesla - the most traded name on Wall Street - to the S&P could mean it won't be easy for investors in the funds that track the index.

“If Tesla continues to be as volatile as it was, then we can expect the index to be slightly more volatile,” said Garrett Nelson, senior stock analyst at CFRA Research.

Tesla has made significant strides since it was founded in California in 2003.

The company is flirting with bankruptcy after seeing boss Elon Musk clash with authorities on everything from self-government technology to virus shutdown.

Musk has sparked controversy thanks to libel lawsuits, live drug use on web chat shows, and Twitter speculations about whether to shut down the EV maker.

He argues that the distinction is despite the fact that a small proportion of competitors such as Toyota, General Motors and Volkswagen are sold.

“I'm very surprised where they are today - I think they are all,” says Nick Shields, senior analyst at Third Bridge who has followed the firm for many years.

Symbolically, he adds, the addition to the index, which tracks the top 500 US companies and measures them at market value, is a "big seal of legitimacy."

What does addition mean?

Tesla's skyrocketing share price this year has made Musk one of the richest men in the world, with a net worth of nearly $ 150 billion, second only to Amazon's Jeff Bezos in Forbes Real-Time Billionaire Rankings.

In part, however, the rally has nothing to do with Tesla's sales outlook - instead, it reflects the expectation of the firm joining the S&P, forcing funds following the index to buy stocks.

After months of speculation, S&P index manager Dow Jones Indices announced its decision last month after Tesla posted quarterly earnings for five straight quarters.

Since then, Tesla shares have jumped about 60%.

More volatility was expected on Friday as index funds bought Tesla and sold other assets to create a proper balance sheet for their investors ahead of the firm's inclusion on Monday.

For the financial world, "This is very exciting as we expect trading activity to take place before the close," says Mr. Nelson. "The street is making popcorn and is going to sit down and watch the show."

Is Tesla overrated?Tesla's large market value means it is expected to account for more than 1% of the index when it joins Monday, replacing real estate firm Apartment Investment, which is worth 0.02% of the index.

The company's heavy weight should worry investors, says Vitaly Kalesnik, partner and head of research in Europe at Research Affiliates, who believes Tesla shares are overvalued and could fall.

“If Tesla continues to rally, that's not a problem, but the stock is falling as well as it rallies,” he says. "If this is a bubble, and we think it is, investors will be disappointed."

He adds that Tesla clearly has growth potential, but "the valuation problem."

Mr Nelson believes the stock still has room for growth given the expected rise in demand for electric vehicles, thanks in part to the climate-friendly policies of new US President Joe Biden.

He predicts Tesla's share price could reach $ 750 over the next 12 months, up from Friday's close of $ 695.

“This is one of the best profit growth stories in the market so far,” he says.