Huge triumph or unmitigated disaster? The inclusion of Tesla in the S&P 500 comes with high hopes and ominous forebodings. Shares of Elon Musk’s company rose to a record high on Friday in a frantic day of trading as investors geared up for the electric carmaker’s much anticipated entrance into the benchmark S&P 500 index. At the same time, some experts are warning that a crash may be on the horizon.
Tesla on Monday will become the most valuable company ever admitted to Wall Street’s main benchmark, accounting for over 1% of the index. The shares have surged some 70% since mid-November, when its debut in the S&P 500 was announced, and have soared 700% so far in 2020. Tesla’s shares ended up 6% at a record $695.
Tesla’s addition to the S&P 500 is forcing index-tracking funds to buy about $85 billion worth of the shares by the end of Friday’s session so that their portfolios reflect the index, according to S&P Dow Jones Indices. Those funds simultaneously have to sell other S&P 500 constituents’ shares worth the same amount.
Shares swung between gains and losses late in the session before surging in price and volume near the end of trading. Turnover in Tesla shares topped $120 billion shortly after 4 p.m. EST (2100 GMT), with volume exceeding 200 million as the stock traded after hours, according to Refinitiv data. Trading volume for Tesla has averaged 53 million shares over the past 10 sessions.
But, according to New Constructs CEO David Trainer, Tesla’s inclusion in the S&P 500 spells trouble for investors: “It marks a new peak in the recklessness of today’s investment environment and will be the catalyst for the long-awaited reconciliation of Tesla’s valuation with the firm’s poor fundamentals”. Trainer added that Tesla’s stock price is overvalued and it’s 716% rally this year is an ominous sign that a crash may be on the horizon. Trainer says that Tesla’s stock should be trading at $172 a share, 73% lower than current levels. JPMorgan analysts have a price target of $90 for Tesla.
JPMorgan recommends investors not weight Tesla shares in their portfolio in equal proportion to the S&P: “Tesla shares are in their view and by virtually every conventional metric not only overvalued, but dramatically so”. JPMorgan analysts led by Ryan Brinkman wrote that investors should “consider that in the two years since December 8, 2018 during which TSLA shares have risen +808% and during which analysts have on average increased their 12 month price targets by +451%, analysts have simultaneously lowered their estimates for Tesla EPS for 2020, 2021, 2022, 2023, and 2024.”
The JP Morgan take comes as other Wall Street banks have grown more bullish Tesla’s outlook.