The S&P 500 is an exclusive club of the 500 biggest companies by market cap on the NYSE or Nasdaq, and the inclusion Friday of three new companies to replace three that are outgoing was a big deal--particularly because EV darling Tesla (NASDAQ:TSLA) wasn’t among those chosen for onboarding. Because Tesla was given the cold S&P 500 shoulder, its stock is taking a beating.
The market-defying stock is down from $502.8 on September 1st to $354.67 at the time of writing on September 8th. That’s a major culling on a snub that no one expected from the S&P 500 club.
The club booted H&R Block (HRB), Kohl's (KSS) and Coty (COTY), and replaced them with Etsy (ETSY), Teradyne (TER) and Catalent (CTLT).
Investors will be forgiven for their confusion.
They will also be forgiven for not having ever heard of Teradyne, an industrial automation and robotics company, and Catalent, a pharmaceuticals developer.
And the surprise that a crafting marketplace such as ETSY has been admitted into the club over the Tesla giant is also easy to understand.
For anyone waiting for an explanation, there won’t be one. The S&P 500 doesn’t explain itself.
That said, the club has to decide whether it’s going to go along with market sentiment or beware the hype when it adds new members.
What the S&P 500 was wary of was the fact that Tesla share prices have risen by more than 4x this year, overtaking the bulk of the companies already in the club not necessarily on fundamentals, but on future hype. That share price rise was also the result of a new breed of retail investors piling into stocks via zero-free trading apps such as Robinhood. And these newbie investors are skewing what traditional Wall Street sees as reality.
Meanwhile, investors have indeed been fickle with the hype, selling off Tesla the minute the S&P 500 snubbed it. That alone goes some way to proving the S&P 500’s point.
So, yes, Tesla is one of the biggest companies in the U.S. and still remains outside the index, much to the dismay of its investors. It’s the most valuable car company in the world. Toyota, the second-most valuable, is only worth ~$215 billion.
But the index fears extremes of hype.
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Instead, we have crafting.
But NASDAQ:ETSY inclusion in the top 500 club, on the other hand, hasn’t done anything for its share price as of the time of writing:
This is one few would have predicted. It’s a major coup all around to have a crafting marketplace where individual crafters sell things like handmade slime, custom furniture, soap, candles--you name it--become a $13-billion monster that ends up on the S&P 500.
But while many will be bemoaning the lack of inclusion for Tesla, ETSY is indicative of a major trend, too: The wildly exploding individual retailer economy that gets to the heart of American entrepreneurship. These aren’t your grandma’s doilies anymore.
The pandemic will help, too, as the shift to e-commerce is bolstered by retail store closings that were already well underway before lockdown. Online spending increased over 30% in the first half of this year alone, according to Digital Commerce 360, and is still on the upward trend despite the removal of pandemic restrictions to some extent.
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How could a company boast a market valuation of $413 bn based on future hype that it will be able to sell more than 6 million units or one-in-four of global EV sales, by 2030. Even if it can shouldn’t warrant such an extraordinary market valuation. Moreover, such projections may not materialize.
Despite all the media attention and the huge government subsidies, Tesla only managed to sell 90,650 EVs during the last quarter. Even with a production of 100,000 EVs by its Shanghai-based factor, this will total almost 200,000 EVs. Still, such a number doesn’t under any circumstances justify a market valuation OF $413 bn.
In a way, the sudden rise in Tesla’s market valuation isn’t dissimilar to the huge hyper-rise in the US housing market whose bubble eventually burst causing the 2008/9 financial crisis which almost brought the US banking system and the global economy to the point of collapse.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London