From tomorrow, Tesla will be joining the Standard & Poor 500 (S&P 500) index. This merge is significant as it is a validation of Elon Musk’s technology as well as being a recognition of the fact that many believe our future is in electric vehicles.
Being included in an index poses a significant level of prestige for private companies and stocks. However, this move also bolsters market reaction, as shown by Tesla stocks shooting up approximately 19% following the announcement. This is perhaps a sign that the company will ultimately transition to be a traditional automaker, along with the anticipation of buying once all the index’s funds update their holdings.
This significant milestone for the company was reachable due to Tesla’s four quarters of profits in 2020, as both a tech and automaker company. Tesla currently trades at a price-earnings ratio (P/E ratio) of over 900 with a market cap of approximately $460 billion. Tesla is poised to sell 500,000 vehicles by this year. In comparison, Toyota Motor Corporation sold over 830,000 vehicles in what was considered a “down year” for the company. Additionally, Toyota trades at a P/E ratio of 14 and has a market cap of under $200 billion. Considering this, it is no wonder why Tesla’s readings are considerable, as their figures are more than some of the world’s largest car makers. Though comparing such companies is futile as Tesla’s valuation considers its tech valuation as well.
When considering whether to invest in this company or not, investors tend to worry about how the company itself will ever catch up to its stock. As many investors will unwittingly invest in their stock through exchange-traded funds (ETFs) that track the S&P 500, many will not see this worry quenched. Additional causes for concern arise from the fact that market trends make it seem like Tesla is the only company in the electric automotive future. This notion is proven false as other global car makers are jumping into the EV market as well. Given their large, well-developed supply and sales networks, which supersedes that of Tesla’s, one cannot honestly believe that other more established automakers will remain behind for long.
Overall, these accomplishments are substantial for the company. Unfortunately, Tesla’s burning of what a reasonable valuation for an innovative, mid-sized automaker should be, daunts their achievements. Therefore, investors find it difficult to see how Tesla will live up to its valuation.