Tesla's eligibility to be included in the S&P 500 puts the index committee in a 'real bind' as its market value soars past Walmart, Datatrek says
- After surpassing Walmart in market value, Tesla is still not included in the S&P 500 index.
- The S&P 500 tracks the 500 largest publicly listed companies based in the US.
- After four straight quarters of profitability, Tesla is finally eligible to be included in the index.
- But according to Datatrek, Tesla's S&P 500 eligibility puts the S&P Index Committee in a "real bind" as it decides whether to include the EV maker.
- It's grappling with both the massive size of Tesla and its recent use of selling regulatory credits to drive profitability.
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Despite Tesla's meteoric rise to becoming the 9th-largest publicly traded company based in the US, it's still not included in the benchmark S&P 500.
The S&P 500 tracks the 500 largest publicly traded companies that are US-based, measured by market capitalization.
After Tesla reported its fourth straight quarter of profitability last month, the electric vehicle manufacturer finally became eligible to be included in the S&P 500.
If included in the S&P 500, Tesla would likely garner a weight of more than 1% of the index, based on the comparative market capitalization and S&P 500 weight of Johnson & Johnson.
"There is simply no precedent for adding such a large piece of fresh equity into the index," Datatrek co-founder Nicholas Colas said in a note published on Monday.
What a Tesla inclusion in the index would mean for S&P 500 volatility is still up in the air, and it's possible that adding Tesla to the index could cause a short term sell-off in equities as the index has to sell down other S&P 500 members to fund the Tesla stake, said Colas.
And that, combined with Tesla's use of selling regulatory credits to drive profitability, puts the S&P Index Committee in a difficult place as it decides whether or not to add Tesla into the S&P 500, according to the note.
Colas explained that Tesla's profitability has mostly been derived from the sale of Automotive Regulatory Credits, which is the sale of credits to other automakers who are not in compliance with state or federal requirements for zero emission vehicle sales.
The regulatory credit sales translate into direct profits for Tesla, as there are no costs related to them. So while the company has been profitable more recently, it hasn't been driven by its underlying business of producing and selling electric vehicles.
"This puts the S&P committee in charge of adding names to the 500 in a real bind, because while to the letter of their 'law' Tesla qualifies for inclusion this is purely due to regulatory arbitrage," Colas said, adding that "even a modest downturn in demand" could push Tesla "into the red again."
Whether or not Tesla is added to the S&P 500 index, shares are poised to continue to rise as much as 71% from current levels, according to a recent note from Wedbush.
Tesla traded 1.5% lower as of 11:50 a.m., and is up 377% year-to-date.
