Potential $TSLA S&P index inclusion:
1) Tesla needs last twelve month & latest quarter profitability to be eligible for S&P. This would require $967m in Q4 (very unlikely) or $265.4m net profit in Q4 + Q1 (>50% chance?).
Inclusion should be very significant for Tesla stock.
1) Tesla needs last twelve month & latest quarter profitability to be eligible for S&P. This would require $967m in Q4 (very unlikely) or $265.4m net profit in Q4 + Q1 (>50% chance?).
Inclusion should be very significant for Tesla stock.
2) Many Tesla shareholders likely have valuations far higher than the current stock price however shareholders may come up against position & exposure limits as the price rises.
It is very important to bring new shareholders onboard to move Tesla share price on to the next level.
It is very important to bring new shareholders onboard to move Tesla share price on to the next level.
3) S&P index inclusion brings new shareholders onboard for two reasons:
A) A huge amount of capital is in index funds tracking the S&P. These will be forced to buy when Tesla is added. I guess ~15-20 million more Tesla shares will be bought by passive funds when Tesla is added.
A) A huge amount of capital is in index funds tracking the S&P. These will be forced to buy when Tesla is added. I guess ~15-20 million more Tesla shares will be bought by passive funds when Tesla is added.
4)
B) A huge amount of capital is controlled by active investors whose funds benchmark the S&P. Many of these will have to start evaluating Tesla as a potential investment as it impacts their performance vs their benchmark.
B) A huge amount of capital is controlled by active investors whose funds benchmark the S&P. Many of these will have to start evaluating Tesla as a potential investment as it impacts their performance vs their benchmark.
5) More detail on the S&P 500 & passive funds:
The market cap of all S&P 500 companies is ~$28.7 trillion. The total market cap of all US equities is ~$36.1 trillion (the closest index to tracking all of this is the Russell 3000 which covers 98% of this market cap).
The market cap of all S&P 500 companies is ~$28.7 trillion. The total market cap of all US equities is ~$36.1 trillion (the closest index to tracking all of this is the Russell 3000 which covers 98% of this market cap).
6) Passive investment includes passive ETFs, Index Mutual Funds & Index Institutional funds. According to estimates in The Economist - passive funds together hold 29.8% of the market cap of the entire US listed equity universe, or ~$10.7 trillion at current levels. 
7) It is important to note Tesla shares are already held by many passive funds. In particular indexes which do not have profitability criteria (Russell, MSCI, Nasdaq etc). However S&P indices have the largest market share of passive investment for US companies.
8) When Twitter was added to S&P 500 one investor estimated 78m shares would be bought by passive funds ~10-11% of the float. reuters.com/article/us-twi…. This suggests ~$3.6trn is held by S&P passive funds & ~15.5-16m Tesla shares would be bought by passive S&P funds on inclusion.
9) You could also look at ETF ownership of Tesla relative to S&P companies as a proxy for the broader passive investment market. ETFs own 3.2% of Tesla shares currently.
10) Compared to some S&P companies (% of shares held by ETFs): Apple 6.2%, Netflix 6.2%, Google 5.0%, Amazon 5.2%, Nvidia 7.0%, GM 6.2%, Twitter 8.5%. I guess the variation between ETF ownership % in these S&P companies is driven by inclusion in thematic or sector ETFs.
11) Maybe Tesla would land between GM & Nvidia once it is in the S&P 500, or more than double the current ETF ownership. If this trend in ETF inclusion is a good proxy for Index institutional & Mutual Funds, then passive ownership in Tesla could double upon S&P 500 inclusion.
12) The S&P 500 is market cap weighted and float adjusted, so in Tesla’s case Elon’s 34 million shares and the ~25 million synthetic shares created by shorts are excluded from share count. This means at current share price Tesla would be rated at a $67bn market cap.
13) I guess ~15-20 million Tesla shares will be bought by S&P passive funds when Tesla is added to the S&P 500. If 20-25 million Tesla shares are already owned by passive Russell, Nasdaq or MSCI funds, then 35-45m shares could be out of circulation due to passive fund ownership.
14) More detail on the Active Funds benchmarked to S&P 500:
When an investor is benchmarked to an index, every variation between their own stock positions and the overall index is an active investment decision.
When an investor is benchmarked to an index, every variation between their own stock positions and the overall index is an active investment decision.
15) Often it is easiest to mostly hold the same shares as the index, but to overweight or underweight certain shares that you think will give you an edge vs passive investment.
16) So when a new company is added to the S&P, over time funds benchmarked to the S&P will look at that company to decide how they should be positioned in that company relative to the market cap weighted index.
17) Most US equity investors have so far avoided valuing Tesla, partly because it is complicated & takes lots of work, partly because they dismissed it based off media & equity auto analyst reports. However many will have to start looking at Tesla if they are benchmarked to S&P.
18) Many new potential investors will read Equity Auto analyst research & buy into the Tesla is just another ICE Auto company narrative, however many will know you can't use the same methods to value a rapidly growing innovation machine as conservative & declining ICE OEMs.
19) In 2016 apparently $2.9 trillion was invested in S&P 500 passive funds while another $5.7 trillion was benchmarked to the S&P 500. investmentnews.com/article/201804…
So these active benchmarked investor’s capital is potentially twice as large as the passive investment capital.
So these active benchmarked investor’s capital is potentially twice as large as the passive investment capital.
20) So over time I’d expect S&P 500 membership to bring far more than the 15-20m direct passive fund Tesla share purchases. S&P 500 membership is a huge catalyst to bring new active shareholders on board & increasing the pool of active investment capital considering Tesla stock.
@threadreaderapp unroll
