Tesla’s Power Surge
When you think of electric cars, you think of Tesla. The electric vehicle industry remained dormant for years, with not much excitement from the general public. Tesla, however, created a new narrative. Aptly named after the genius inventor Nikolas Tesla, it has proven to be a dominant force in the industry. Money from eager investors floods into Tesla’s stock more and more every day. Notably, the high-performing ETF of ARK Investment Management holds around $1.5 billion of Tesla shares. ARK’s founder, Catherine Wood, has projected Tesla’s stock to potentially rise to $7,000. While Tesla is not yet at a $7,000 share price, gaining a spot on the S&P 500 certainly places them on the right track.
On Dec. 21, history will be made. The addition of Tesla to the S&P will be the largest company ever added to the index, with a $538 billion valuation, shattering the previous record of $127 billion held by Berkshire Hathaway. The addition makes Tesla the seventh-largest company listed on the index. With their success, it was inevitable that they would be included on the index, and with numerous straight quarters of profits, it became a question of not if, but when.
Standard and Poor’s 500 stock index, dubbed the S&P 500, is possibly the most highly vaunted index for a company to be selected for. The index provides an economic pulse of sorts, illustrating how well many of our nation’s largest companies are performing. The highly impressive criteria to be inducted onto this index include metrics such as a specific minimum market capitalization and average trading volume, ensuring that only the largest firms make the cut. However, these are only prerequisites to be considered for the opportunity. The firms that qualify are determined to be added to the index by the highly selective “Index Committee” at Standard and Poor’s Dow Jones Indices. One of the main reasons companies vie to reach this milestone is due to the potential for an enormous increase in value once added. Since Tesla is now a member of possibly the most well-known and traded index, when individual investors or investment firms desire to invest in the S&P 500, they are partly investing in Tesla. The recent rally of Tesla’s shares seems to indicate this. The firm’s stock is up around 580% this year alone, with excitement piling in from investors who are eagerly awaiting the arrival of Tesla to the index.
Interestingly, due to the astronomical size of Tesla, there was an ongoing debate as to whether it is better to add the firm to the S&P 500 in the usual one simple step, akin to “ripping the band-aid off,” or the second option of an unprecedented two-part addition process. This two-part process would consist of adding pieces of Tesla to the index over a few days, allowing the trading volume to be spread out, hence making it more easily digestible for investors rebalancing their portfolios to accommodate such a large addition. Executives from the S&P actually consulted with investors in November, questioning which option would be more beneficial. Many investors are worried that the massive addition will cause a wild session of index trading volatility since suddenly flocks of fund managers will be trading the involved indexes. However, Steve Sosnick, chief strategist at Interactive Brokers, believes that the classic one-step move is a safer decision, as opposed to testing out a new method on such a followed index.
The biggest one to stand to gain from this landmark index inclusion is none other than the world-famous CEO of Tesla, Elon Musk. In recent weeks, Musk’s net worth has already shot up over $15 billion, vaulting him to second place on the Forbes 500 with an eye-popping $140 billion. As more money continues to pour into his firm, that number will likely continue to grow, reaching astronomical heights as if it were one of Musk’s SpaceX rockets.
Photo Credit: pixabay.com
Photo Caption: Tesla is the largest S&P 500 addition of all time.