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Feb. 3, 2020, 9:08 a.m. EST

More fuel for Tesla? Stock could join the S&P 500 by the end of the year

The only barrier is profitability over four consecutive quarters

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By Jeff Reeves, MarketWatch


AFP/Getty Images
Tesla CEO Elon Musk speaking in January.

Tesla has been disrupting the automotive industry and taking Wall Street by storm since its 2010 IPO. Its latest milestone: a trajectory that will take the electric vehicle manufacturer to “comfortably” more than 500,000 vehicles sold this year.

Tesla /zigman2/quotes/203558040/composite TSLA +5.04%  has turned plenty of heads along the way, but one key milestone remains: inclusion in the closely watched S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.60%   index of top U.S. stocks.

That could change in 2020 for however. Inclusion in the S&P depends on certain criteria , and Tesla already qualifies based on its share liquidity, domestic headquarters and market capitalization.

The final and perhaps most burdensome measure, however, is that “the sum of the most recent four consecutive quarters’ Generally Accepted Accounting Principles (GAAP) earnings (net income excluding discontinued operations) should be positive as should the most recent quarter.” This is a feat Tesla hasn’t yet managed, but which finally appears within reach.

After all, Tesla posted positive earnings Wednesday, earning 99 cents per share under GAAP (and an adjusted $2.14 a share) on a modest revenue increase. That builds on a return to profitability in its October report.

If the chips fall right, that means Tesla will be eligible for inclusion in the S&P 500 in the second half of this year after two more consecutive quarters in the black.

“We do not comment on individual companies’ potential inclusion in an index,” a spokesman for S&P Dow Jones Indices said.

For now, Wall Street analysts are skeptical about the current quarter, calling for a small loss per share under GAAP, according to the consensus of those polled by FactSet as of Thursday morning, before a return to solid profitability. That and other forecasts are of course subject to change.

Tesla earnings estimates
  Sep '19 Dec '19 Mar '20E Jun '20E Sep '20E Dec '20E
  Q3   Q4   Q1   Q2   Q3   Q4  
Earnings per share 1.86 2.14 0.99 2.01 2.90 3.73
EPS - GAAP 0.78 0.58 -0.17 0.74 1.55 2.11
EPS - Non GAAP 1.86 2.14 0.99 2.01 2.90 3.73
Source: FactSet            

If Tesla is on track for potential inclusion in the S&P 500 later this year and is posting consistent profits, should you rush to pile in? Or do Tesla shares already reflect this, and it’s time to “sell the news” after the stock’s recent run?

The case for caution

The biggest reason for caution is, of course, the fact that Tesla has had challenges stringing together profits in the past. Consider that at the end of 2018 the electric car manufacturer posted its first-ever back-to-back profitable quarters, too. Tesla has surely notched some wins since then, but couldn’t turn that streak into a full year of operations in the black.

Furthermore, it’s not like Tesla is sneaking up on Wall Street. This could be perhaps the most closely watched stock in investing and it’s almost willfully naive at this point to presume you see some angle that isn’t fully reflected in the stock price. That sentiment is pretty much summed up in one analyst’s note from last week titled “ Earnings Taking Off, but Shares Already Left the Orbit ,” where UBS ups its target on Tesla but reiterates a sell rating based on the stock rising too much and too quickly in the last several months.

But perhaps most concerningly, investors need to remember that Tesla is the most-shorted stock on Wall Street with nearly $15 billion placed in bearish bets against it. Wunderkind CEO Elon Musk may simply scoff at these investors as “ jerks who want us to die ,” but it’s undeniable that a ton of investors are putting their money behind this trade and not just scoffing at Tesla at cocktail parties.

Sure, some of those may be irrational haters of the stock. As I’ve argued here on MarketWatch, bears who look down their noses at Tesla based on valuation models for stodgy, traditional blue chips are simply missing the point. But it seems dangerously naive to write off every investor in this massive constituency of short sellers as a Luddite stooge who is bound to get steamrolled.

/zigman2/quotes/203558040/composite
US : U.S.: Nasdaq
$ 407.34
+19.55 +5.04%
Volume: 67.21M
Sept. 25, 2020 4:00p
P/E Ratio
1,060
Dividend Yield
N/A
Market Cap
$361.35 billion
Rev. per Employee
$439,627
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/zigman2/quotes/210599714/realtime
US : S&P US
3,298.46
+51.87 +1.60%
Volume: 2.18B
Sept. 25, 2020 5:06p
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