May 28

Why Tesla’s S&P 500 Inclusion Won’t Transform The Electric Car Market

Irina Logutenkova
Nov 30, 2020

Photo by Bram Van Oost on Unsplash

Tesla Inc (TSLA) will finally become part of the S&P 500 index on 21 December. It is still unknown who the company will replace, but come the day, passive investors around the world will move to own a fraction of Tesla. This may seem like a big milestone for electric vehicles and alternative energy producers. But the picture is more complicated than that, because Tesla is not a mere electric car manufacturer – and it’s not the largest auto company to produce electric cars.

By market capitalization, Tesla is an unprecedent addition to the S&P 500 – so much so, that the index is consulting with the investment community to determine whether company should be added all at once or in two separate tranches. At the end of 16 November, when the S&P announced its decision, Tesla’s market capitalization stood at $387 billion. Since then, it has increased to $544 billion as of 25 November – twice the market capitalization of the second biggest automotive company, Toyota Motor Corp, with $231 billion. But the major difference is that Toyota sold 10.7 million vehicles around the world in 2019, while Tesla sold only 367.5 thousand cars.

These numbers illustrate the point that Tesla is not your typical auto manufacturer – it is more of a high-tech company closer to Apple, one that sells prestige, peer respect and the promise of a bright future. High-ranking oil and gas managers buy Tesla products not out of a need for a car nor due to concerns about climate change. They buy Tesla for the same reason that millions of people buy every new iPhone: for the innovation and hype.

Another factor that separates Tesla from other auto makers is that it uses its sales revenue to build a unique ecosystem. Morgan Stanley, in a recent note to investors titled “Time to Value Tesla’s Software & Services Business,” significantly upgraded the company’s target price after incorporating its recurring revenues from software and services. Tesla currently offers a range of services that include the Full Self Driving capability, premium in-car infotainment, improved vehicle acceleration and battery range, and perks such as supercharging, maintenance packages and games. Morgan Stanley forecasts that Tesla Network services will account for 18%-20% of total company EBITDA by 2030, and that’s not counting the company’s insurance and ride-sharing businesses.

While inclusion in the S&P 500 is good for Tesla, the company’s current low level of sales – even amid all the promises of growth – means there is still a long way to go before we reach the electric car future. To make a significant shift from oil to electricity in our means of transportation, sales of electric cars need to reach the level that standard car sales see every year. From this point of view, the more encouraging piece of news – from the same week that the S&P 500 announced its inclusion of Tesla – is General Motors’ announcement that it will expand its line-up of electric car models, add new production facilities and create a new marketing unit dedicated to electric vehicles. Chairman and CEO Mary Barra promised that 40% of the company’s U.S. entries will be battery-powered electric vehicles by the end of 2025. The company also projects that its Ultium battery packs will decrease in cost by 60% by achieving twice the energy density within that same period.

And speaking of batteries, another promising sign for this segment is the appearance of SparkCharge on Shark Tank, the entrepreneur pitch show on ABC, this October. The company creates compact, portable and fast-charging systems for electric vehicles. Its mission is to decrease anxiety associated with owning an electric car (“what happens if my battery dies before I reach my destination?”). When we see promising entrepreneurs working to expand the electric vehicles market, there is hope that our “collective battery” won’t die before we reach the electric future.

As for investors in Tesla, due to the recent rally in share prices, they can now buy an electric car or two for their loved ones using that profit. It beats any list of Christmas present ideas by a long shot.

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