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Tesla Will Join S&P 500 Stock Index in December 2020

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At long last, Tesla is set to join the S&P 500. The automaker is set to be added to the benchmark index on Monday, December 21st, 2020.

The latest decision comes after Tesla was unexpectedly snubbed from joining the index in early September. 

How Will Tesla Integrate the S&P 500?

According to a press release by the S&P Dow Jones Indices, Tesla “will be added to the S&P 500 effective prior to the open of trading on Monday, December 21 to coincide with the December quarterly rebalance.”

The press release also added the following: 

“Due to the large size of the addition, S&P Dow Jones Indices is seeking feedback through a consultation to the investment community if Tesla should be added all at once on the rebalance effective date or in two separate tranches ending on the rebalance effective date”.

On one hand, this means that Tesla will replace a company that will ultimately be disclosed by the Indices. On the other hand, because of the company’s massive valuation, it is not yet known if it will join the S&P 500 all at once or not.

The automaker is currently valued at $386.8 billion, making it the 11th largest company in the world by market cap. Equity research firm Baird stated that Tesla will be the largest company ever to be added to the S&P 500.

What were the Immediate After Effects of SPDJI’s Announcement?

Following the news, the company’s stock surged between 12-13% in after-hours trading. 

After closing at $408.09 on Monday, Tesla shares were trading between $445.93 and $466.20 per.

Tesla’s stock spiked by 12-13% in after-hours trading yesterday after the announcement / Image Source: Google

What were the Conditions fulfilled by Tesla to Join the Index?

The general conditions for companies that intend to adhere to the S&P 500 index are the following:

  • The company must be headquartered in the United States.
  • Has a market cap worth at least $8.2 billion.
  • The company’s stock price must be at least $1 per share.
  • It must post at least four consecutive quarters of positive earnings.

Tesla is effectively headquartered in Palo Alto, California. The automaker’s current market cap is more than 48 times bigger than the required minimum.

Additionally, Tesla has posted five consecutive positive quarterly earnings: $143 million on September 30, 2019, $105 million on December 31, 2019, and $16 million on March 31, 2020, $104 million on June 30, 2020 and $331 million on September 30, 2020.

The company easily fulfilled all the required conditions and qualified for Index inclusion since the previous quarter. The S&P 500 Index committee, however, still opted against including Tesla, until yesterday.

What is Next for Tesla?

According to Wedbush Securities analyst Dan Ives, the decision “speaks to the sustained profit trajectory that Tesla is now finally getting into this elusive club”. Ives is also known for having a neutral rating on the automaker’s stock.

Michael O’Rourke, chief market strategist for JonesTrading, noted that “it is hard to understand why it was unsuitable in September but is appropriate in November”. 

Tesla’s indexation will not only convince investors to have a more bullish outlook for the company’s stock. It will also create more demand for it, as the FOMO factor builds up. 

The S&P 500’s announcement is a strong indication that the company could be worth north of $1 trillion in the near future. The company’s market cap peaked at $464.3 billion last August, rising from this year’s low of $66.5 billion in March. 

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