In an early Christmas present to Tesla stockholders, S&P Dow Jones has indicated that Tesla will be added to the S&P 500 index as early as December 21. Tesla stock jumped by about 8 percent in Tuesday’s trading on the news.
The inclusion is likely to attract investment from index funds and managed funds that track the S&P 500. Based on current market data, these index and managed funds could snap up as much as 13 percent of Tesla’s free float shares, which can be traded without restrictions.
If a lot of the stock goes into passive index funds, this could help to reduce the wild price swings seen by Tesla stock in the past. Previously, Elon Musk got himself into trouble with regulators with a Tweet that caused a sudden spike in Tesla stock. A single Tweet is less likely to cause passive index funds to either snap up a lot of stock out of “fear of missing out” or panic dump their holdings.
As things stand now, analysts say that Tesla’s stock may be somewhat overvalued, based on current sales levels. Although there have been hints that Tesla might enter the potentially lucrative India market and it’s made strides in establishing Superchargers at locations around the world, it has not yet justified a stock that is currently trading at about 110 times its consensus 2021 earnings. For reference, the other stocks in the S&P 500 trade an average of 26 times their consensus earnings.
Investors may be banking on anticipated developments such as the more efficient battery making process that Elon Musk announced at Tesla’s “Battery Day” event and improved sales that may come with more affordable models like the upcoming $25,000 one that Musk says could be released within the next three years.
Competitors also may not have an equivalent of Tesla’s Full Self-Driving feature for their electric vehicles. The AI behind Full Self-Driving is constantly improving with billions of miles’ worth of driving data and counting. It’s estimated that 57 percent of new Tesla buyers select the Full Self-Driving option, which may have been worth an estimated $1.4 billion dollars in software sales in 2019.
Tesla expects the price of Full Self-Driving to increase on a regular basis as the company continues to add new features. Recently added features for Full Self-Driving include the ability to handle speed bumps. Elon Musk is reportedly also considering a subscription option for people who don’t want to pay thousands of dollars up front for Full Self-Driving. This could create a predictable earnings stream for Tesla along with making Full Self-Driving more accessible for its customers.
The revenue from software sales could grow once the Full Self-Driving software has passed its public beta phase and Tesla brings its supercomputer online. Musk says that Full Self-Driving is getting very close to requiring no human intervention at all.
This adds up to the possibility of making Tesla an attractive stock to add to index and managed funds that track the S&P 500 index. Some analysts say that as much as $51 billion could be used by these funds to buy Tesla stock when it is added to the S&P 500 index.