Tesla (TSLA) to Enter S&P 500, Stock Rallies Post Announcement

Tesla, Inc. TSLA has secured a spot in the prestigious S&P 500 Index, effective Dec 21, before the market opens to coincide with the December quarterly re-balance.

This announcement was made by the S&P Dow Jones Indices on Nov 16, following which shares of Tesla rallied more than 14% in the after-hours session, adding more than $50 billion to the company’s stock-market value.

This admission marks a historic achievement for the red-hot electric vehicle (EV) maker. The S&P 500 is the most respected stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. Considered as a representation of the U.S. stock market, it is updated time to time to add evolving companies in order to better represent the market.

The prerequisites to be eligible to join the S&P 500 index include the company being based in the United States, having a market capitalization of at least $8.2 billion, being highly liquid, and having at least half of its outstanding shares available for public float. Additionally, the company’s most recent quarter's earnings and the sum of its trailing four quarters' earnings must be positive.

Notably, Tesla registered $451 million in profits through the first nine months of 2020. Moreover, the EV maker put up a stellar third-quarter performance, with earnings of $331 million on revenues of $8.77 billion, marking the company's fifth consecutive quarter of profitability.

This gave rise to speculations that the carmaker might be added to the index in the September reshuffle. However, to investors’ surprise, Tesla was not included to the index then, despite fulfilling all the eligibility requirements, which came in as a major setback for the company. Nevertheless, the company is finally set to be included in the December re-balancing, making it the biggest new entrant in the group’s history.

Tesla has a market cap of nearly $387 billion, bigger than General Motors Company GM, Toyota Motor Corp. TM and Volkswagen AG VWAGY combined. The company will be the among the top 10 heavyweight companies in the index. The latest announcement symbolizes Tesla's advent as a consistently profitable company after piling up losses in its initial nine years as a public company.

Per the S&P Dow Jones Indices, Tesla will be one of the largest companies to be added to the S&P 500 in the past decade. Owing to its large size, the index is seeking consultation to determine whether Tesla should be added all at once or in two separate tranches on Dec 14 and Dec 21. Tesla has gained this spot by replacing another S&P 500 company, information about which will be released at a later date.

According to the S&P Dow Jones Indices, Tesla's admission to the widely-followed stock market index means investment funds indexed to the S&P 500 will have to short about $51 billion worth of shares of companies already in the S&P 500 and utilize those funds to purchase shares of Tesla, to ensure that their portfolios accurately reflect the index. Tesla will represent about 1% of the index.

The latest news marks a major victory for CEO Elon Musk, who has been eyeing this for long. Tesla’s shares continue to be on a wild race this year. Shares of the company have appreciated 387.7%, year to date, as the California-based automaker has built and delivered more electric vehicles. The stock, which split five for one in August, is likely to witness a surge in demand post its prestigious entry in the S&P 500 this December.

Tesla currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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