Some Investors got into Tesla (NASDAQ: TSLA) expecting it to get into the S&P 500 and profit from the subsequent stock price boost. There is no denying that some of the enthusiasm around Tesla that has since it’s stock price fly way beyond expectation rests on the shoulders of it getting into the S&P 500.
Unfortunately, Etsy (NASDAQ:ETSY), Teradyne (NASDAQ:TER), and Catalent (NYSE:CTLT) would be added to the S&P500 instead, effective September 21, 2020. And the S&P 500 shoulders is no more for Tesla stock to rest partly on, hence, the after-hours fall.
This news is a big disappointment for Tesla investors, one that will shove (and have shoved) off some price value from Tesla stock.
Tesla stock priced dropped 7% after hours following the news.
The news is coming after Tesla’s largest shareholder Baillie Gifford had reduced its stake in the company from 6.3% to 5%. It has been a really disappointing week for the EV maker. This trend has seen investors asking ‘if Tesla stock will crash or continue to rise eventually?’
Here are my thoughts and expectations for Tesla stock following the news:
1. Tesla’s profitability is questionable
Technically, Tesla was profitability for four straight quarters and as such, it met the demand for inclusion in the S&P 500.
However, there had been worries that Tesla might miss out on the S&P 500 because it wouldn’t have been profitable without regulatory credits. Peter Cohan, a Forbes Contributor, had warned investors to avoid Tesla stock after the $428 million regulatory credits it reported in its Q2 report.
One could argue that Tesla probably incurs no direct expenses to earn these regulatory credits, hence, they are almost pure profit.
Without regulatory credits, Tesla would very likely report a loss and not be eligible for inclusion in the S&P 500.
2. Tesla is somewhat volatile, risky
Tesla is the kind of stock that can start the week at USD 444.88 per share, rise up to USD 502.12 on Tuesday and fall down to USD 382.29 on Friday.
It is a stock for investors with high risk tolerance, plain and simple.
However, the profile of the S&P 500 cannot tolerate such a risk. Investors who put their money in the S&P 500 are mostly running away from having to tolerate high risk.
And I think this was playing in the mind of the index managers when they decided to snub Tesla.
3. Investors will buy the dip
Seeing how Tesla performed this year, there are many investors waiting for the stock to dip, so they can buy the dip. Now they have their dip and I expect them to buy right back in mass.
The buyback will give a falling Tesla a lifeline, and perhaps more than a lifeline if the buybacks are heavy. Pushing demands for Tesla way up.