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According to the S&P 500 announcement on Monday, electric car manufacturer Tesla (TSLA) will be joining the Index on December 21.
Tesla’s current market cap is roughly $387 billion, which is significantly more than long term members of the Index like Toyota or Coca-Cola. It is the 11th largest company by market capitalization in the US at the time but has all the potential to replace JP Morgan Chase & Co. as the 10th largest company.
According to the guidelines of S&P:
“to be eligible for S&P 500 index inclusion, a company should be a U.S. company, have a market capitalization of at least USD 8.2 billion, be highly liquid, have a public float of at least 50% of its shares outstanding, and its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive.”
In October, Tesla reported its highest quarterly profit yet – a whopping $874 million for Q3. That marked the fifth consecutive profitable quarter for Tesla and propelled it into the embrace of the S&P 500 Index.
Technically, Tesla qualified for S&P 500 after Q2, which recorded its fourth consecutive profitable quarter. However, the Index committee passed over and added other companies like Etsy instead. Wall Street analysts have speculated that the S&P might have been apprehensive about the excessive stock volatility or the regulatory credits, which boosted Tesla’s profits.
Even now, the decision to include Tesla in the Index was not an easy feat, according to S&P 500 analysts. With a colossal market cap like that, it will be the largest company ever to be added to the S&P. The inclusion of Tesla would force investment funds indexed to the S&P to sell approximately $50 billion worth of stock so as to make room for the California car manufacturer.
The S&P 500 has not announced yet which company Tesla will be replacing. However, no company is large enough to offset Tesla’s inclusion. This is why the index is contemplating adding the company in two tranches.
“Due to the large size of the addition, S&P Dow Jones Indices is seeking feedback through a consultation to the investment community to determine if Tesla should be added all at once on the rebalance effective date or in two separate tranches ending on the rebalance effective date,” S&P 500 stated.
Tesla has had its fair share of stock fluctuations over the years; however, in 2020, the company saw its stock skyrocket based on its innovative products such as battery improvements, as well as EV tech and a general increase in demand and supply.
The stocks have spiked over 13% since the announcement of S&P inclusion. Tesla closed at $408.09 on Monday, but the stock was trading at $540.47 at some point after-hours.
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