On November 16th, Tesla’s monolith status appeared to be cemented upon the announcement made by the S&P Dow Jones Indices confirming its addition to the S&P 500 index. The inclusion has been forecasted to occur prior to the open of trading on Monday 21st December.
What is the S&P 500?
S&P stands for Standard and Poor, the names of the two founding financial companies that officially introduced the index on March 4, 1957. Essentially, it is an index that tracks the stocks of five hundred large-cap US companies based on market capitalisation. Market capitalisation is defined by the total value of shares issued by the company, which is calculated by multiplying the number of shares by their stock price. The index acts as a representation of the stock market’s performance by reporting the risks and returns of the underlying stocks. In order for a company to be considered for inclusion, certain criteria have to be met; the corporation must have an unadjusted market capitalisation of at least $8.2bn, at least 50% of its fixed assets and revenues must originate from the US and the sum of total earnings over the past four quarters must be positive, a feat only achieved by the Electric Vehicle (EV) manufacturer this summer.
How has Tesla performed recently?
Whilst the COVID-19 pandemic has undermined businesses from various geographies and industries, Tesla registered a 600% share price gain this year, inflating their market capitalisation to $535 billion, despite only producing a fraction of units made by their competitors. All of this is with, typically, the more bullish holiday period of the year still to come.
The $200 million acquisition, in February 2019, of the battery component manufacturer Maxwell Technologies also contributed to the stock’s recent bullish run. The focus of the acquisition was on Maxwell’s dry electrode research which promises 10-20% cost reduction through a simplified manufacturing process whilst also doubling the battery life. This move signalled Tesla’s desire to become self-reliant at the battery production stage and foreshadowed their possible long-term growth prospects thanks to higher quality products.
How is the EV market evolving?
During their 2020 battery day on September 22nd, Tesla, to address the ‘S’ in Environment, Social and Governance (ESG), vowed to remove cobalt from their cathodes as cobalt mining in EV supply chains was found to be in violation of multiple human rights; raising issues surrounding child labour, low wages and dangerous working conditions. Similarly, they announced plans to increase their recycling percentages for used batteries, thus strengthening their ESG status. As ESG reporting continues its trajectory to becoming mandatory within the private sector, the EV industry will increasingly attempt to address such issues.
The evolution of global regulations has also been accelerated by the enforcement of the Paris Agreement, whereby global leaders agreed to limit climate change to a 1.5 degrees increase within this century. This has inspired more EV accommodating policies around the world, notably in the US and China. For instance, Chinese commitments to EVs have amassed up to $36 billion over four years, playing an instrumental role in fostering competition within the industry, an example being Xiaopeng Motors.
How did markets respond to the news of Tesla’s inclusion?
Since the announcement, Tesla’s shares have surged 40% to $585.76. There is anticipation that the flurry of buying that comes with index inclusion will temporarily drive up its share price even further. Similarly, Goldman Sachs predicts that the shares will eventually touch $600, which represents a 2% gain from their current value, showcasing the upwards trajectory for the stock.
Challenges associated with joining the S&P 500
The inclusion of Tesla is considered unique owing to the company’s size; its stock market value is currently greater than $400 billion which will make it the biggest company to ever be added to the index. Upon inclusion, Tesla alone will account for around 1% of the index. Consequently, S&P index funds will have to sell about $51 billion worth of shares in existing index companies and use the money to purchase Tesla shares, in order to ensure that their portfolios reflect the structure of S&P 500 accurately. This highlights the significant amount of reshuffling that passive investment funds will have to do to because of Tesla’s inclusion.
What does this mean for the future of green tech?
Ultimately, it seems safe to say that the future is bright. The global concern surrounding climate change is finally affecting changes in several regional regulations and policies, making it lucrative for businesses to develop ideas that tackle environmental issues like waste management, controlling emissions and curbing non-renewable energy sources. Such incentives will continue to spark innovative ideas as it has done thus far, landing green alternative technology developing companies like Tesla alongside the American elites within the S&P 500.