By
Bena Ilyas
April 23rd, 2024
Many market analysts believe that the addition of Tesla to the S&P 500 may signal the beginning of the end of the TSLA bubble.
Today marks the last day before the stock of American electric vehicle maker Tesla Inc (NASDAQ: TSLA) is added to the S&P 500 Index (INDEXSP: .INX). As reported by Reuters, the runup to the addition of Tesla to the S&P 500 is poised to generate a lot of frenzy near the close of trade on Friday as index-tracking funds will need to load up on shares so their portfolios can correctly reflect the index.
Tesla stock has surged by about 700% this year with its market capitalization gaining an extra $500 billion this year alone. The company’s meteoric rise has created a divide amongst Wall Street analysts and investors alike with some, staying bullish on the company’s future prospects and the others noting that the overbloated valuation of the firm is not sustainable in the longer term.
Nonetheless, the long-awaited inclusion of Tesla to the S&P 500 is a testament to the company’s successive profitable 5 quarters under Elon Musk, the firm’s Chief Executive Officer. As Tesla heads into the S&P 500 index on Monday, a general price projection for the stock from analysts polled by Refinitive is pegged at $396.30 per share, which would represent a 36% decline from its current price. Tesla’s long-standing investors, as well as new ones, need not fret about this price target as other Wall Street analysts projects more impressive figures for the stock.
Many believe that the inclusion of Tesla to the S&P 500 will not slow down the company’s growth in the coming years, due to the firm’s novel technologies and products.
“It’s become clear this year just how far ahead of the competition the company is in terms of not only its technological abilities but its combination of range and performance at an affordable price,” said Gary Robinson, portfolio manager of the Baillie Gifford US Equity Growth fund, who owns the stock.
Tesla closed Thursday trading session with a 5.32% surge to $655.90
Can the Addition of Tesla to the S&P 500 Be a Disaster?
Many market analysts believe that the addition of Tesla to the S&P 500 may signal the beginning of the end of the TSLA bubble. This particular notion is strongly held by Rob Arnott, a Smart Beta pioneer who according to Bloomberg has been sounding alarm on the dangers of adding such large-cap companies as Tesla to the S&P 500 or any similar stock index.
One of the reasons why analysts like Arnott holds a differing view about the prospects of adding firms like Tesla to any index is because the index tends to suffer when the major factors driving the growth of the largest companies get weakened. Arnott also noted that historically, companies tend to struggle when they are added to the S&P 500, and Tesla may not be an exception.
When people say, ‘When is the Tesla bubble going to burst?’ I’ve jokingly said on the 22nd of December,” Arnott noted. “Nobody knows, but that’s when the index addition argument disappears and that’s when the market starts to search out what the company’s really worth.”
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