Millennials have piled into Tesla stock amid hopes that the carmaker will join the S&P 500 index. That could be a costly mistake.
Tesla has always been a millennial favorite, and that’s only grown more evident over the past month. During the past 30 days, nearly 200,000 additional investors have purchased the carmaker’s stock on electronic brokerage Robinhood.
The surge in Robinhood users – who skew toward the millennial demographic – holding Tesla stock has coincided with a breathtaking 50% rally since mid-June.
The timing of this rally is not a coincidence.
Next week, Tesla announces its second-quarter financial results. It could prove to be the company’s most significant earnings presentation ever.
One of the major factors driving millennials into the stock is the expectation that Tesla’s second-quarter results will show a profit.
This doesn’t mean they really care about earnings.
What matters to them is that this would mark the company’s fourth straight profitable quarter. This would technically qualify the Elon Musk-led EV giant for inclusion in the S&P 500.
Tesla has long met the large-cap index’s market cap and liquidity requirements, but profitability has always been a sticking point.
Since going public in 2010, the company has recorded few profitable quarters. Fiscal year 2019 was the first time it turned an annual profit, and even then, not every quarter was profitable.
When Tesla reports earnings next week, shareholders will be crossing their fingers that the automaker’s profitability streak will extend to a fourth quarter for the first time ever.
Tesla stock bulls shouldn’t get too ahead of themselves, though. This is still a question of if – not when.
Tesla has a history of recording second-quarter losses even in the best of times.
A year before that, Tesla posted its biggest quarterly loss ever.
Besides its pattern of second-quarter losses, 2020 has brought a host of unexpected challenges.
It doesn’t look like Tesla will break this streak of Q2 losses any time soon. According to 33 analysts polled by FactSet, Wall Street expects a GAAP loss of $1.10 per share and an adjusted loss of $0.47 per share.
Even if Elon Musk and company prove Wall Street wrong, it doesn’t mean the millennials going long on Tesla stock will reap a windfall if it joins the S&P 500.
Bulls believe a potential S&P 500 listing gives the stock upside because it would force index fund providers to purchase TSLA shares. Funds that track the S&P 500 oversee an estimated $4 trillion in assets.
In other words, they believe the stock will “pull a Yahoo.” The web services provider surged 64% in 1999 in the five days following the announcement that it would join the S&P 500.
A Yahoo-style bounce is far from a guarantee, though. Some of the most recent entrants into the S&P 500 can attest to this.
Online ticket seller Live Nation Entertainment (NYSE: LYV) joined the index on December 23, 2019. Since then, Live Nation has fallen by about 34%. Much of LVY’s decline stems from the pandemic, but it’s not the only example.
Looking at 1999-era Yahoo and assuming Tesla’s stock will play out the same way is a perfect example of survivor bias – if you can even call Yahoo a “survivor.” Don’t forget what happened to the once-mighty company in the two decades that followed.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.
Last modified: September 23, 2020 2:04 PM