One of the most expected events for the end of the year for financial markets happened yesterday – Tesla was included in the S&P500 index.
The much-anticipated move did not generate the volatility expected, perhaps because the market activity is slowed by the fact that people are focused on the upcoming holidays rather than on the markets.
The rise of Tesla’s shares in 2020 has been nothing short of amazing. They gained over 700% year to date, exceeding performance in any other asset – stock, cryptocurrency, or commodity. But not everyone is bullish on the company’s stock. The current valuation is simply absurd if we use the auto industry as a benchmark, which means that investors are rushing in to buy Tesla’s shares for a different reason.
Tesla Trades Lower at the S&P500 Debut
Tesla is not your regular car company – it is an electric car manufacturer that seeks competitive advantage by integrating technological features and upgrading them. In other words, it attracts two types of investors – the ones interested in gaining exposure to an electric car manufacturer and the ones betting on technology to disrupt the industry.
The company’s share price closed lower yesterday, and the decline seems more accentuated today – down 6.49% in pre-market. The news that Apple is pushing ahead to challenge Tesla on the self-driving car technology scared some investors as Apple has the resources to become a tough competitor.
But a 6% move on Tesla’s shares is nothing new for its investors. Such volatility on the stock market is unusual, but Tesla rose to fame exactly for this reason. Now that the stock is part of the S&P500 index (i.e., the market benchmark), critics argue that Tesla’s volatility will hurt the index’s performance.
One cannot ignore the calls for Tesla being a bubble. Just like Bitcoin, which rose from $10,000 to over $24,000 in less than two months, Tesla is considered a possible bubble on the stock market. If we look back in time, especially during the tech bubble in the late 90s early 2000s, we cannot ignore some interesting similarities. For instance, it is not the first time when the S&P500 committee introduces ‘hot’ names in the index. Back in the day, companies like Peoplesoft, Citrix, or Teradyne were added in the index right before the tech bubble burst.
Yet, the most famous example comes from Yahoo. On the last day of November 1999, Yahoo entered the S&P500 index. It climbed 67% from the day of the announcement until the first day part of the index. A month later, Yahoo’s share price peaked.
Will this be the faith of 2021 Tesla?