Shares Surge as Tesla Poised to Be Largest-Ever New S&P Member

Tesla Inc., Elon Musk’s 17-year-old upstart carmaker, took a giant step toward blue-chip respectability, getting named to one of the world’s most famous stock indexes in an action that will greatly broaden its investor base.

The announcement on Monday that Tesla will enter the S&P 500 on Dec. 21 follows months of speculation, and one temporary setback, after the stock failed to make the cut during the index’s quarterly rebalancing in early September. The anticipation has helped drive a nearly fivefold rally in the stock this year to almost $390 billion, making the electric vehicle pioneer the biggest company ever to be added to the gauge. It will also be one of the index’s most influential constituents with a weighting that falls around those of Berkshire Hathaway Inc., Johnson & Johnson and Procter & Gamble Co.

It’s so big that S&P Dow Jones Indices said it is seeking feedback from the investment community to determine if Tesla should be added all at once or in two separate pieces. The company that Tesla is to replace in the index will be named later, the index provider said.

Tesla shares jumped 13% in early trading Tuesday to $460 as of 9:45 a.m. in New York. The stock is up about 450% this year.

The news of S&P 500 inclusion “will of course likely drive a rally in the stock today,” JMP Securities analyst Joseph Osha wrote in a note to clients before the market opening. “We think there is still upside,” he said, adding that Tesla should be valued like other “category killer” companies such as Apple Inc., instead of compared with other car companies. Osha reiterated his market outperform rating and price target of $516.

Tesla's status as an S&P 500 contender has attracted investors

“This was a little unexpected happy day for me,” said Ross Gerber, chief executive officer at Gerber Kawasaki Inc. Tesla is the top holding for the Santa Monica, California-based wealth management firm, with approximately 130,000 shares worth about $55 million as of Monday’s close.

After analyzing the index just last week, “it was just kind of mind blowing that Tesla still wasn’t in the S&P,” Gerber said in a telephone interview. “So sure enough, here it is.”

While entry into the benchmark is a rite of maturity that may dim some of Tesla’s cult stock appeal, membership comes with benefits, including forced purchases by index-tracking investors and mutual funds. The inclusion and the rapid rally over the past few months mean money managers overseeing passive funds will have to sell tens of billions of dollars worth of shares in their existing S&P holdings to make room for Palo Alto, California-based Tesla. On the other hand, longtime investors looking to exit their positions may now try to get out, knowing that index funds have to buy.

These crosscurrents may mean more trading volatility, though that is not new for Tesla. Ever since going public in 2010, the company’s popularity with Musk acolytes and legions of day traders has made it one of the more volatile stocks of its size in America. A steadier, more institutional ownership base could help to eventually ease those swings.

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Tesla has solidified its position as the leading electric carmaker globally, even though competition is slowly heating up. It has overcome challenges including sometimes-severe production snarls, a massive cash burn rate and concerns about the demand for battery-powered vehicles in an industry dominated by gas-powered cars. In mid-September, Tesla reported a fifth consecutive quarterly profit, quieting critics who questioned its ability to make money.

Indeed, all it had taken was Musk hinting at the second-quarter profit -- the company’s fourth consecutive profitable quarter -- in a letter to employees in late June to trigger a 66% surge in the stock over a span of 17 trading days, since the results checked off the last requirement for S&P 500 inclusion.

Tesla’s sky-high share price also prompted a 5-for-1 stock split, a move aimed at making it more accessible to individual investors. The shares started trading on a split-adjusted basis on Aug. 31.

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