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Tesla Stock Might Join the S&P 500 – Bulls Are Still Playing With Fire

Last Updated September 23, 2020 2:04 PM
Mark Emem
Last Updated September 23, 2020 2:04 PM
  • Nearly 200,000 Robinhood “investors” have bought Tesla stock over the past 30 days.
  • Many traders are gambling that an S&P 500 listing will send the stock even higher.
  • That may not be a safe bet.

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.

Tesla stock
In the past 30 days, an average of over 6,000 millennials have been buying TSLA on Robinhood every day. | Source: Robintrack 

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.

Is Tesla about to join the S&P 500 index?

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’s second quarters have been jinxed

Tesla has a history of recording second-quarter losses even in the best of times.

In 2019, Tesla reported a Q2 loss of $408 million , despite delivering a record number of vehicles. (So don’t read too much into this year’s estimate-shattering delivery results. )

A year before that, Tesla posted its biggest quarterly loss  ever.

Tesla’s worst quarterly loss came during Q2 2018. | Source: @AFirm4Creatives/Twitter 

Besides its pattern of second-quarter losses, 2020 has brought a host of unexpected challenges.

Tesla has executed multiple price cuts during the past several months. And although the EV maker delivered 90,650 vehicles  for the quarter, this came at the expense of margins.

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.

Bulls bet Tesla stock is about to ‘pull a Yahoo’

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.

S&P 500 Index
Investors are hoping Tesla mimics Yahoo if and when it joins the S&P 500. | Source: @talesftf/Twitter 

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.

Recent S&P 500 inductees have disappointed investors

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.

Zebra Technologies (NASDAQ: ZBRA), which joined the benchmark index on the same date, is up by just 4% . Steris PLC (NYSE: STE) – another late December inductee – has appreciated by only 1% .

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.