Tesla makes it big again: Prepares to join S&P 500 as largest new member

By Rahul Vaimal, Associate Editor
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Tesla Elon Musk
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In a move that will massively expand its investor base, US-based Tesla Inc., Elon Musk’s 17-year-old upstart carmaker, took a big step by being named to join one of the world’s most prominent stock indexes.

The announcement that Tesla will join the S&P 500 on December 21 follows months of speculation and a temporary setback after the stock failed to make a cut during the early September quarterly rebalancing of the index. The optimism helped fuel an almost five-fold surge in the stock to nearly $390 billion this year, making the pioneer of electric cars the largest company ever to be added to the index.

The S&P 500, or simply the S&P, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices.

The Tesla addition is so big that S&P Dow Jones Indices is seeking feedback from the investment community to decide if Tesla should be added all at once or in two separate pieces. The index provider said the business that Tesla is to replace in the index will be named later.

Tesla shares grew as much as 12 percent to $456 in extended New York trading following the news. Recent reports also suggest that following this surge Mr. Musk is poised to become the world’s third-richest person, leapfrogging Facebook founder Mark Zuckerberg. His wealth has jumped $90 billion this year, the biggest gain on the ranking of the world’s 500 richest people.

A tough journey

Although competition is slowly heating up, Tesla has solidified its position as the world’s leading electric carmaker. It has overcome obstacles in an industry dominated by gas-powered cars, including severe production glitches, a massive cash burn rate and doubts about the need for battery-powered vehicles. Tesla posted a fifth consecutive quarterly profit in mid-September, quieting critics who doubted its capacity to make money.

Indeed, in a letter to staff in late June, all it had taken was Musk hinting at the second-quarter profit to cause a 66 percent rise in stock over a period of 17 trading days, because the results checked off the last S&P 500 inclusion criteria.

Tesla’s sky-high share price also prompted a 5-for-1 stock split, a move aimed at making it more accessible to individual investors. The shares started trading on a split-adjusted basis on August 31.

From from conventional

Joining one of the world’s most exclusive clubs is a validation for Mr. Musk and his unorthodox management style. His chief lieutenants are little known and rarely made available to the media or investors, and Mr. Musk courts controversy like few other corporate captains. He has picked fights with securities analysts and been sued for fraud by securities regulators for tweets claiming he had “funding secured” to take the company private.

He has also complained more than once that the stock price of Tesla is too high. But that hasn’t deterred investors.

With several secondary share offerings over the past decade, Tesla has tapped into the investor goodwill, raising $14 billion through February and another $5 billion in September. This has enabled it to finance the development of new vehicles and rapidly expand manufacturing capacity.

High hopes for the future

The new goal of Mr. Musk is to make Tesla more of a global players in markets such as Asia and Europe. Recently, the automaker opened a plant in China and is building a factory in Germany that Musk visited this week for meetings with local officials. Tesla is now constructing a second plant in the US, which is intended to extend the product range of the company to include a pickup named the Cybertruck.

As the entire automotive industry moves to accept electric powertrains, Mr. Musk aims to cement first-mover advantage in the EV market while the valuation of his company was greater than Volkswagen AG, Toyota Motor and General Motors combined as on November 13.

While Tesla is being rewarded by investors for dominating the global electric-car market, demand is only a small fraction of new vehicle sales. This provides many opportunities for growth, but highlights the challenge of making battery-powered vehicles more of a mainstream choice.

Nevertheless the recent success of the business and its booming valuation have also placed a spotlight on the entire electric vehicle market, sparking a rise in the shares of many potential entrants, several of whom still have a way to go until production starts.