Tesla: Rocking the Boat or Floating Nicely?

Tesla, the electric vehicle and clean energy company, has been at the forefront of sustainable transport for the past decade. Since Tesla went public on the NASDAQ stock exchange in 2010, the company has been making countless headlines. One of the positive recent stories was Tesla’s introduction on to the S&P 500 Index.    

The S&P 500 is a premier stock market index of 500 of the US’s largest and most valuable companies, containing big names such as 3M, Adobe, and Apple.

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Was This Long Overdue?

Tesla have had to earn their inclusion onto this index. In September 2020, the S&P 500 overlooked adding Tesla to its index of companies. Instead, it added Etsy, Teradyne and Catelent. These 3 companies took the place of H&R Block, Coty, and Kohl’s. If anything, however, it is surprising that the automaker hadn’t been added at this time. 2020 was massively successful for Tesla with its shares having surged more than 730% by the end of the year.   

It may well have come as a shock to many that Tesla was not included back in September. However, it is worth noting that, due to the index’s stringent criteria, a committee of investors for the S&P make changes to it every quarter. Therefore, it is plausible that Etsy, Teradyne and Catelent could just as easily be eliminated from the index in the next quarter. For this reason, it may not actually have been that surprising that Tesla were included in by the end of 2020.  

Furthermore, Tesla is now valued at more than the top seven automotive companies put together. This club includes:

  • Ford ($35 billion);
  • Honda ($50 billion);
  • BMW ($59 billion);
  • General Motors ($59 billion);
  • Daimler ($74 billion);
  • Volkswagen ($99 billion); and
  • Toyota ($211 billion).

In October 2020, Tesla reported its largest quarterly profit to date. It earned $874 million in the third quarter of 2020, lifting its income up 156% from the year before. The quarter marked the company’s fifth consecutive quarter of growth. This may have come as a blessed relief to investors, and indeed the company itself, as Tesla has in the past struggled to turn a yearly profit. 

The announcement that the company would be joining the index came on 16 November 2020, with Tesla’s stock price rising 70% in response.      

In anticipation of the entry onto the index, Tesla’s shares surged to a record high of $695, valuing the company at more than $650 billion. The company valuation on the stock market is known as the ‘market capitalisation’, which is the total aggregate value of all the outstanding shares in a company (basically, how much the company is worth!).         

However, it may – or may not – seem a surprise but shares in the electric carmaker actually fell by more than 5% on its debut day on 21 December 2020. However, this was amid widespread investor concern about the potential impact on global trade of the mutant coronavirus strain identified in the UK.     

All image rights belong to According To A Law Student (ATALS).

The Road to the S&P 500:

The story of Tesla has been one of ups and downs. The inclusion is certainly, for now, one of those ups, despite the company never having made an annual profit. This has been quite an issue for Tesla. Delays to the ‘Gigafactory’ (where Tesla produces its batteries), as well as issues with its supplies, cancelling the partnership with American-wide company Home Depot, and cutting down on 9% of the workforce really haven’t helped the company. Add this to the monumental aim of revolutionising an entire industry, and it isn’t surprising to discover that not all has been easy for Tesla.        

Nevertheless, Tesla are worthy recipients of this position. They have seen unprecedented growth in recent times, especially throughout 2020, and are, arguably, sorely needed in the index, if not for the promotion of solar and clean energy. 

In fact, Tesla entered the S&P 500 as the sixth-largest company, after Apple, Microsoft, Amazon, Alphabet and Facebook. It would be interesting to see whether Tesla could eventually make it to the top of the pile. You could say that, with environmental concerns and global warming being more of an issue than ever before, it may be inevitable that Tesla will continue their good run of consistent growth and become the dominant technological force. On the other hand, Tesla should really be aware of these other tech companies breaking into the electric car market. Apple, for one, have already been in early talks with Hyundai over developing a driverless electric car – Apple hopes to be able to deliver this by 2024.    

Like with any headline, there are some who doubt Tesla’s success in this market. They are not without their reasons though, as Tesla’s shares sank 5% to $659.99 in the first 30 minutes into the session. According to the investment firm, Research Affiliates, Tesla may begin to underperform in the S&P market.

What this seems to suggest is a possible red flag for Tesla. The company has been growing rapidly in recent years in an attempt to pioneer a way into the world of electric travel. What these predictions (and they are only predictions!) may infer is that Tesla could become complacent on reaching this status and start to slack. However, this has never been Tesla’s way, and we should hope that the company proves these doubters wrong and continues to flourish. Whilst some investors believe Tesla to be significantly overvalued, its rocketing share price certainly indicates that the majority believe the company can deliver on its promise.   

With climate change on the rise, it is simply inevitable that the world will look to electric vehicles to replace our heavy dependency on fossil fuels. Those who believe in Tesla’s success consider the company’s technological aptitude to put it in pole position to beat the rest who still mainly rely on these more traditional methods. Tesla is a thoroughbred among those carmakers who are (comparatively) slower to change with the times.        

Conclusion:

Tesla has (despite the pandemic) had a positive 2020. Their share price rose eightfold, ending the year at $705, and therefore valuing the company at nearly $669 billion. They overtook Japanese giant, Toyota, to become the world’s most valuable car manufacturer. Moreover, the company had further success, having dispatched a total of 499,550 vehicles in 2020 (albeit narrowly missing their target of half a million deliveries).          

In January 2021, Elon Musk – CEO and founder of Tesla – was identified as the world’s richest person, with a net worth of over $185 billion (£136 billion). An increase in Tesla’s share price pushed Musk past Amazon owner Jeff Bezos, who had been the world’s richest person since 2017, and is now worth $184 billion. There are plentiful reasons to suggest that, even with their highs and lows, and dare say it, Covid-19, Tesla can prove the doubters wrong and continue to thrive into 2021 and beyond!

This article was written by Tom Bailey. Tom is a final year LLB law student at the University of Law in Guildford, and a Content Writer for According To A Law Student (ATALS). Tom is keen to pursue a career as a Solicitor, having a specific interest in property law.   

 

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