Tesla Stock Is Soaring. It's Controversial. And Soon, It Could Be In Your Portfolio

Jul 20, 2020
Originally published on July 21, 2020 7:01 am

The most controversial stock on Wall Street could be about to go mainstream.

Superfans and super-haters have long been waging a financial war over the future of Tesla, placing big bets on whether CEO Elon Musk would transform the world or crash and burn. (So far, the Tesla haters have lost a lot of money in this battle.) The stock had a particularly wild ride in the first half of this year.

Now, if Tesla reports another quarterly profit this week, as is widely expected, the company will have cleared the last big hurdle for entry into the S&P 500, the enormously influential index of 500 huge corporations.

And if the company gets added to the index, millions of people with retirement savings — whether they love Musk, hate him or have never heard of him — would have a tiny stake in the future of Tesla.

Soaring stock values

Warren Buffett is famous for his careful investment decisions, based on evaluating a company's underlying value. Musk says that kind of analysis is important, but ...

"I mean, it's kind of a boring job, if you ask me," Musk told podcaster Joe Rogan in May.

Musk doesn't do boring jobs. He does run The Boring Company — which bores tunnels (get it?). He also runs SpaceX, which aims to colonize Mars, and Tesla, which set out to save the Earth by making electric vehicles cool and ubiquitous.

And while Musk has fallen short of some of his bold promises, he's realized many others. SpaceX has put humans into orbit. Tesla became America's bestselling luxury car and jolted the entire auto industry into electrification.

Ever since it went public, Tesla has repeatedly confounded many analysts who try to do a sober-minded, Buffett-esque assessment of the company's value. They crunch the numbers and find that Tesla is overvalued. And they watch as the stock keeps soaring up and up.

In May, Musk tweeted that even he thought Tesla stock was too high. The price has doubled since then.

Aswath Damodaran, a professor of finance at the Stern School of Business at NYU, says Tesla is a story stock, with its value driven by intangibles.

"When the mood and the momentum catches it, it doesn't matter what the news is, it doesn't matter what the numbers are," he says. "The stock is either going to soar if the mood is right or collapse if the mood is not there."

And lots of people have been in the mood to invest in Tesla. From mid-March to mid-July, the stock quadrupled. The company is now worth more than Toyota, even though Toyota sold 30 times more cars than Tesla did last year.

To be clear, Tesla has been doing well. Production numbers beat expectations, even despite the pandemic, and Tesla vehicles are a hit. Damodaran has owned Tesla stock before; he's not a short-selling Tesla hater.

But this kind of stock surge, Damodaran says, is very difficult to justify based on traditional financial metrics. At some point, though it's impossible to say when, he says the price will have to return to earth.

The Tesla bulls disagree. Cathie Woods, the CEO of ARK Invest, predicts Tesla stock could go as high as $7,000. She says other analysts are evaluating Tesla as an auto company, while her team views it as an autonomous driving, battery and artificial intelligence company.

Electric carmaker Tesla has seen its stock values soar in recent months.
Alexander Hassenstein / Getty Images

Expected inclusion in an exclusive club

Faith in Tesla's future (and Elon Musk's vision) has long powered Tesla stock, but there's a new wrinkle that could be adding a bit of extra fuel. After it announces results on Wednesday, Tesla is expected to meet every requirement for entering the S&P 500 index.

After that, it could be added to the index at any time. Anticipation of that event could be helping boost prices now.

Investment funds, like retirement accounts, often track indexes like the S&P 500 to invest in the entire stock market (or as close of an approximation as possible) instead of trying to pick individual winning stocks. These passive investments, which are cheaper and generally more successful than funds that try to pick winning stocks, are growing in popularity.

"The purpose is to emulate the market, not to beat it," explains Howard Silverblatt of the S&P Dow Jones Indices. That's the company behind the S&P 500, although Silverblatt notes he is not currently on the committee responsible for picking the companies on the index.

Entering the S&P 500 is not just prestigious. It has immediate consequences for the market.

"When something goes in the index, a lot of mutual funds and licensed indexes have to buy it," Silverblatt says. "Whether they think it's the best deal or the worst deal, they have to buy it."

If Tesla gets added to the index, many, many people would suddenly have Tesla in their investment portfolios. And that buying spree usually pushes a stock price up — slightly, and temporarily.

A few years ago, economists examined the widespread belief that getting added to the S&P 500 provides a permanent boost in stock value. The answer?

"There is no effect on the price of the stock just by virtue of being added to the index," Asani Sarkar of the New York Federal Reserve Bank told NPR last week.

So trading Tesla on the expectation of an S&P 500 boost might be a misstep.

Of course, most current Tesla investors aren't banking on the S&P to decide the future of Tesla's value. It's Elon Musk they believe in.

Under his contract as CEO, he stands to earn a massive bonus if the company's stock keeps rising. And because of all the Tesla stock he owns, even without that bonus, a rising stock lifts his wealth.

Earlier this month, as Tesla stock soared, Musk became richer than Buffett.

Copyright 2020 NPR. To see more, visit https://www.npr.org.

DAVID GREENE, HOST:

Tesla has seen its stock soar really to mind-boggling heights recently. And the electric automaker might soon be joining the S&P 500. This would mean the stock would show up in millions of people's retirement portfolios. NPR's Camila Domonoske explains why this is significant.

CAMILA DOMONOSKE, BYLINE: Warren Buffett is famous for carefully deciding which companies to invest in based on their underlying value. Tesla CEO Elon Musk is not impressed.

(SOUNDBITE OF PODCAST, "THE JOE ROGAN EXPERIENCE")

ELON MUSK: And to be totally frank, I'm not his biggest fan.

DOMONOSKE: Here's Musk on Joe Rogan's podcast in May.

(SOUNDBITE OF PODCAST, "THE JOE ROGAN EXPERIENCE")

MUSK: He reads a lot of sort of annual reports of companies and all the accounting. And it's - I mean, it's kind of a boring job if you ask me.

DOMONOSKE: Musk has several not-boring jobs. He runs SpaceX, which aims to colonize Mars and Tesla, which set out to save the earth by making electric vehicles cool. Here he is telling Jay Leno why he wanted Tesla's Cybertruck to be bulletproof.

(SOUNDBITE OF TV SHOW, "JAY LENO'S GARAGE")

JAY LENO: I mean, I don't...

MUSK: It's badass and super cool.

LENO: Well, yeah. OK. That's - super cool.

MUSK: (Laughter).

LENO: See, I like that answer. That's a good answer.

MUSK: I mean, do you want your trucks to be bulletproof or not?

LENO: Yeah. I guess I would. I guess I would.

DOMONOSKE: He's having more fun than Warren Buffett. But Buffett's job is an important one, even Musk agrees - careful evaluation to make smart investments. The decisions are normally driven by numbers, by profits and dividends, not by feelings and perception.

ASWATH DAMODARAN: I mean, it's a financial investment. It's not a Picasso.

DOMONOSKE: That's Aswath Damodaran. He is a professor of finance at the Stern School of Business at NYU. And he argues that Tesla's stock. Well, it might actually be a bit like a Picasso, with its value driven by intangibles.

DAMODARAN: When the mood and the momentum catches it, it doesn't matter what the news is. It doesn't matter what the numbers are. The stock is either going to soar if the mood is right or collapse if the mood is not there.

DOMONOSKE: Lots of people are in the mood to invest in Tesla. During this pandemic, Tesla's stock quadrupled. The company is now worth more than Toyota, which made 30 times more cars last year. Yes, Tesla has been doing well, but this kind of stock price? In May, Elon Musk tweeted that even he thought Tesla's stock was too high. Since then, the stock has doubled. Cathie Wood, a high-profile Tesla investor, says, sure, this doesn't make sense if you look at Tesla as a car company. But she argues it's not an auto company.

CATHIE WOOD: Tesla is a robot company - autonomous - an energy storage company - batteries - and an artificial intelligence company.

DOMONOSKE: She thinks the stock could go much higher. Faith in Tesla's future has driven its stock up for years. But there's a new wrinkle that could be adding a bit more fuel. Tesla is poised to enter the S&P 500. That influential index tracks 500 huge corporations. Index funds are a way to invest in the entire stock market instead of trying to pick winners.

HOWARD SILVERBLATT: And the purpose is to emulate the market, not to beat it.

DOMONOSKE: Howard Silverblatt is with the S&P Dow Jones Indices, the company that makes the index. This week if Tesla reports another quarterly profit, as is expected, it will be eligible to be added to the index, which isn't just a matter of prestige. A lot of index funds track the S&P 500. So when a stock gets added to it, those funds...

SILVERBLATT: Have to buy it. Whether they think it's the best deal or the worst deal, they have to buy it.

DOMONOSKE: That means many people would suddenly own a tiny slice of Tesla in their retirement funds. And that buying spree tends to push stock prices up, but only temporarily. Of course, most Tesla investors aren't banking on the S&P to decide the future of Tesla's value. They believe in Elon Musk. And earlier this month, as Tesla's stock soared, Elon Musk, he was richer than Warren Buffett.

Camila Domonoske, NPR News.

(SOUNDBITE OF PENSEES' "FACELESS ARTIST") Transcript provided by NPR, Copyright NPR.