Shares of Tesla (TSLA) are under pressure on Monday as shares began trading on the S&P 500 index. Tesla replaced Apartment Investment and Management Co. (AIV) and was also added to the S&P 100, replacing Occidental Petroleum (OXY). In a research note last week discussing the impact of Tesla on S&P 500 valuation, Goldman Sachs analyst David Kostin said that given its large size and elevated multiple, many investors "erroneously intuit" that the company's inclusion into the S&P 500 will lift the index’s current multiple. Nonetheless, he believes Tesla's inclusion could have a meaningful impact on index performance.
S&P 500 INCLUSION: In a research note ahead of Tesla joining the S&P 500, Goldman Sachs analyst David Kostin highlighted that it will "lift the index P/E ratio by just 0.4 multiple turns, much less than most investors expect." Based on its current capitalization, the company will join the index with a weight of about 1.5%, he added. The analyst pointed out that given Tesla's large size and elevated multiple, many investors "erroneously intuit" that the company's inclusion into the S&P 500 will lift the index’s current 22-times P/E multiple — which already registers close to the highest levels on record — by two multiple turns or more.
Although Tesla will hold a 1.5% market cap weight in the index, based on consensus 2021 estimates its earnings will represent just 0.2% of the S&P 500 total, he contended. Nonetheless, Kostin believes Tesla's inclusion could have a meaningful impact on index performance. Tesla has risen by 657% this year, outperforming the S&P 500 by 640 pp. Had it been a constituent all year, it would have lifted the total index return by roughly 200 bp, from 16% to 18%, he noted.
DEMAND DYNAMIC TO BENEFIT TESLA: Wedbush analyst Daniel Ives raised the firm's price target on Tesla to $715 from $560, while keeping a Neutral rating on the shares. Heading into year-end and 2021, the analyst is seeing a major inflection of EV demand globally, with his expectations that EV vehicles ramp from about 3% of total auto sales today to 10% by 2025. Ives believes this demand dynamic will "disproportionately benefit the clear EV category leader Tesla" over the next few years especially in the key China region, which he thinks could represent about 40% of its EV deliveries by 2022 given the current brisk pace of sales.
China remains a greenfield EV market opportunity as the analyst believes overall EV sales can potentially double in the region over the next few years given the pent-up demand for EV vehicles across all price points. Further, Ives thinks China could see eye-popping demand into 2021 and 2022 across the board with Tesla's flagship Giga 3 footprint a major competitive advantage, as domestic players such as NIO Inc. (NIO), Xpeng (XPEV), and Li Auto (LI) also are also firing on all cylinders.
PRICE ACTION: In late morning trading, shares of Tesla have dropped nearly 5% to $662.43.
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