Elon Musk’s Tesla is one of Wall Street’s hottest and most controversial stocks, and it could soon be joining the S&P 500 as analysts expect the electric car maker to post its fourth consecutive profitable quarter later this month.
With Tesla announcing higher-than-expected second quarter vehicle deliveries last week, Wall Street analysts are increasingly confident that the company will post a profit when it reports earnings on July 22.
If Tesla is able to clear that milestone, it will mark four consecutive quarters of profits—a first for the carmaker and a key requirement for a company looking to get added to the S&P 500, Reuters first reported on Thursday.
If the electric car maker does get added to the index, not only will it be a huge accomplishment for billionaire CEO Elon Musk, it could also mean a big pay day for investors betting on Tesla’s success.
Tesla recently became the most valuable car company in the world and now sports a market capitalization of about $250 billion: That would make it one of the most valuable companies ever added to the S&P 500, larger than 95% of companies already on the list.
The news follows a standout year for the company so far, with shares surging more than 230% in 2020, despite widespread economic fallout from the coronavirus pandemic.
Tesla’s stock, now above $1,400 per share, has been gaining serious momentum since mid-2019, rising over 580% in the last twelve months.
But as it continued to rally to record levels, short sellers—a key source of frustration for Musk—have ramped up their bets against the stock: At $19 billion, it’s the largest short level on record for a U.S. company, according to S3 Partners.
What to watch for
Analysts across the board are predicting massive demand for Tesla shares if it does get added to the index. Howard Silverblatt, senior index analyst for S&P Dow Jones, told Reuters that the most recent comparable situation he could recall was Yahoo stock during the dot-com era. In 1999, Yahoo surged 64% in five days of trading on news that it would be added to the S&P 500. “The lesson learned from Yahoo was that when you have an up and coming issue that may possibly go into the index, you should already own a little of it,” Silverblatt said. “If you had to get into that stock, you were paying a heck of a premium compared to owning it a week earlier.” In a scenario where Tesla doesn’t get added to the S&P 500, its stock could sharply reverse to the downside, analysts warn.
Tesla’s stock is 91% overvalued according to investment researcher Morningstar, which assigns it a fair value of just $731 per share. Morningstar analyst David Whiston admits that while Tesla “will have growing pains” and has a long way to go before reaching mass-market volume—something that he predicts won’t happen until the next decade, “even a pandemic causes no fear for the market with this stock.” He did reiterate, however, that it is “important to keep the hype about Tesla in perspective relative to the firm’s limited, though now growing production capacity.”