Tesla’s blockbuster Entry into S&P 500

Elon Musk has taken a big move Tesla Inc., Elon Musk’s 17-year-old upstart carmaker, took a giant step toward blue-chip respectability Monday, getting named to one of the world’s most famous stock indexes in an action that will greatly broaden its investor base.The announcement that Tesla will enter the Standard & Poor’s 500 index Dec. 21 follows months of speculation, and one temporary setback, after the stock failed to make the cut during the index’s quarterly rebalancing in early September. The anticipation has helped drive a nearly fivefold rally in the stock this year to almost $390 billion, making the electric vehicle pioneer the biggest company ever to be added to the gauge. It will also be one of the index’s most influential constituents with a weighting that falls around those of Berkshire Hathaway Inc., Johnson & Johnson and Procter & Gamble Co.

It’s so big that S&P Dow Jones Indices said it is seeking feedback from the investment community to determine if Tesla should be added all at once or in two separate pieces. The company that Tesla is to replace in the index will be named later.

Although entry into the benchmark S&P 500 is a rite of maturity that may dim some of Tesla’s cult stock appeal, membership comes with benefits, including forced purchases by index-tracking investors and mutual funds. The inclusion and the rapid rally over the last few months mean money managers overseeing passive funds will have to sell tens of billions of dollars worth of shares in their existing S&P holdings to make room for Tesla. On the other hand, longtime investors looking to exit their positions may now try to get out, knowing that index funds have to buy.

Tesla has solidified its position as the leading electric carmaker globally, even though competition is slowly heating up. It has overcome challenges including sometimes-severe production snarls, a massive cash burn rate and concerns about the demand for battery-powered vehicles in an industry dominated by gas-powered cars. In mid-September, Tesla reported a fifth consecutive quarterly profit, quieting critics who questioned its ability to make money.

Indeed, all it had taken was Musk hinting at the second-quarter profit — the company’s fourth consecutive profitable quarter — in a letter to employees in late June to trigger a 66% surge in the stock over a span of 17 trading days, since the results checked off the last requirement for S&P 500 inclusion.

Tesla’s sky-high share price also prompted a 5-for-1 stock split, a move aimed at making it more accessible to individual investors. The shares started trading on a split-adjusted basis Aug. 31.

We believe the sustained profitability trajectory as evidenced in the September quarter was the final straw that got Musk & Co. into the S&P 500 this time around,” Wedbush Securities analyst Daniel Ives wrote in a note to investors. He has a neutral rating on the stock.

Joining one of the world’s most exclusive clubs is a validation for Musk and his unorthodox management style. His chief lieutenants are little known and rarely made available to the media or investors, and Musk courts controversy like few other corporate captains. He has picked fights with securities analysts, smoked marijuana during an interview and been sued for fraud by securities regulators for tweets claiming he had “funding secured” to take the company private.

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