Tesla Shares Fall 21% After S&P 500 Exclusion & GM Acquires a Stake in Rival Nikola Motor
Electric automaker Tesla Inc.'s rising stock price has been hit by the unpredictable realities of the financial markets. On Tuesday, U.S. automaker General Motors announced its taking a $2 billion stake in electric truck startup Nikola Motor Company. The announcement follows last Friday's news that Tesla missed out on being included in the elite S&P 500 stock index after posting four consecutive profitable quarters for the first time in its history.
Tesla shares fell as much as 20% today, catching many investors off guard investors who were betting that Tesla was a shoo-in for a coveted S&P 500 listing based on its market cap, which now tops $300 billion.
The S&P 500 Index is made up of 500 large-cap U.S. companies across a wide variety of industries, and represents the financial might of the U.S. corporate economy. It's limited to just large-cap companies, including Microsoft Corp, Amazon, Apple, Facebook and Alphabet Inc.
Today's stock drop was Tesla's biggest one day drop since February, after its stock reached record highs this summer topping $2,000 a share before its recent stock split, which made Tesla the world's most valuable automaker.
Ahead of the S&P's announcement last Friday before the long holiday weekend, Tesla's price had largely reflected the assumed inclusion in the S&P 500, said Baird analyst Ben Kallo to Bloomberg, who called the decision "a relatively surprising development."
"We think the stock could be under pressure following the delay of S&P 500 inclusion, particularly from investors who bought ahead of the announcement expecting an opportunity to sell to passive funds," Kallo wrote in a note to Bloomberg. However, Kallo didn't anticipate GM's strategic partnership with 5-year-old startup and Tesla rival Nikola Motor Co.
Declines started premarket on Tuesday and worsened as the news broke that General Motors was taking a $2 billion equity stake in electric vehicle startup Nikola Corp. and partnering with the company to engineer and manufacture its Badger pickup, which is likely to become a strong rival to Tesla's Cybertruck.
On the other side of the coin, the news of the strategic partnership with GM sent Nikola shares up 46% while GM's stock rose 8% during Tuesday's trading session.
S&P Dow Jones Indices, which determines the makeup of the index, said on Friday afternoon that online marketplace Etsy Inc., tech firm Teradyne Inc. and pharmaceutical company Catalent Inc. would be added in its quarterly rebalancing, but not Tesla.
As reported by Bloomberg, Tesla's failure to make it into the S&P 500 may be connected to "question marks about the sustainability of regulatory emission credit sales which are currently underpinning earnings," said Michael Dean, an analyst with Bloomberg Intelligence.
Tesla counts on a significant portion of its profits from selling emission credits to rival automakers.
Over the past several years, Tesla earned hundreds of million of dollars from selling the credits to other automakers, including General Motors and Fiat Chrysler Automobiles. In its 2020 second quarter earnings report released in July, Tesla reported $428 million in revenue from sales of the credits, accounting for 7% of its total revenue in Q2, CNBC reported.
Kallo however, still expects Tesla will eventually be added to the S&P 500 benchmark, and the company's "Battery Day" event planned for Sept. 22 could result in another run up of Tesla shares.
Tesla Chief Executive Elon Musk has promoted the Battery Day event as "one of the most exciting days in Tesla's history."
Although Tesla's big announcement on Sept 22 is still unknown, the company is working with China's leading battery producer CATL, which claims it's developing a 1.2 million mile EV battery with a 16-year lifespan. CATL is Tesla's battery supplier for Model 3 vehicles built in China at Tesla's new Shanghai factory.
Many investors remain optimistic that Tesla will unveil some type of new battery technology during the event.
Tesla's 2020 Annual Meeting of Stockholders will be held on Tuesday, Sept 22, 2020. Immediately following the annual meeting will be Tesla's much anticipated Battery Day event.
Even with the biggest one day drop of its stock in its history, and a 34% drop in the month of September, Tesla's stock has jumped by more than 300% this year, making it the second best performance in the Nasdaq 100 Index behind Zoom Video Communications Inc. Zoom's stock took off as companies are suddenly relying on video communications for employees as offices remain closed due to the pandemic.
Tesla reported its fourth consecutive quarterly profit in July for the first time in its history, which made the company eligible for an S&P 500 listing. Now the automaker will have to wait a bit longer.
Tesla shares entered correction territory last week, following the news that its largest institutional investor Edinburgh-based investment firm Baillie Gifford scaled back its stake to below 5% in line with its portfolio guidelines. The UK investment firm previously held a 6.32% stake in Tesla.
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