Tesla stock could be eligible to join the S&P 500 after the earnings report that is scheduled to be released this week. The shares have been on an impressive run over the last several months, and many investors may have been betting on the stock’s addition to the index.
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Tesla priced for perfection
In a recent note, Credit Suisse analyst Dan Levy doubled his price target for Tesla stock from $700 to $1,400 per share and maintained his Neutral rating. He said the shares seem priced for perfection, so any "material hiccup could drive a correction."
He credits several factors with driving the increase in Tesla stock, including multiple positive data points or catalysts and increased interest in electric vehicles and in Tesla itself as its stock is the most widely bought stock on Robinhood in the last month. Other positive factors for the shares include covering by short sellers and buying by quant and momentum investors.
In addition to the positive factors that have already happened, Levy sees even more positive catalysts ahead. The second-quarter earnings report, which is scheduled for this week, is one of those positive catalysts.
Other potential drivers for Tesla stock include if it were to join the S&P 500, the upcoming battery day, and additional plans for capacity expansion. He particularly pointed to the company's plans for capacity expansion as a driver of its stock because in the next year and a half, its capacity could almost double from its current level at about 700,000 to about 1.3 million units. The expanded capacity implies upside to volume estimates for 2022. He is estimating about 970,000 vehicles for that year.
Tesla is now the most valuable automaker in the world even though it will sell just 450,000 to 500,000 vehicles this year, amounting to less than 1% of global volume. Levy said justifying the current stock price requires one to assume that by 2025, Tesla will sell 2.2 million units, which would make it as big as the German luxury brands.
Meanwhile, it trades at an elevated multiple of 30 times P/E. He said this puts the burden on Tesla to execute on these lofty expectations, although the high stock price provides the company with a significant advantage in cost of capital.
In addition to raising his base case for Tesla stock to $1,400, Levy also boosted his Blue Sky scenario to $2,300 and his Grey Sky scenario to $800 a share. He said the main driver is an increase outlook for volumes. He now expects Tesla to deliver 1.8 million vehicles in 2025, versus his previous estimate of 1.2 million.
Tesla stock could join S&P 500
Tesla is scheduled to release its second-quarter earnings report on Wednesday, and we expect some movement in its stock around that earnings report, especially if it becomes eligible to join the S&P 500. To be eligible to join the index, the automaker must report another profitable quarter, which would make it profitable for a full year.
If Tesla stock does join the S&P 500, it would likely mean yet another surge in the share price. Thousands of funds that track the S&P would be obligated to buy the stock if it is added to the index. It also means that the many investors who hold funds that track the S&P 500 would suddenly find Tesla in their portfolio.
Although Tesla stock may be climbing in the short term due to the possibility that it could join the S&P 500, NPR reports that there is no long-term impact of being added to the index on a stock price.
