FINANCE TODAY | ISSUE NO.21
2020 IS ELON MUSK'S YEAR
2020 has been nothing but kind to Elon Musk, whose fortune continues to grow as Tesla (NASDAQ: TSLA) shows no signs of slowing down anytime soon. Musk recently received the fourth tranche (a group of securities offered as part of a single transaction) of his 12-tranche compensation plan with Tesla. The plan allows Musk to purchase stock options at each tranche equivalent to 1% of Tesla’s current outstanding shares at a predetermined price. These options become available to him once he achieves the market capitalization goals set up for each tranche, alongside the option of achieving goals regarding annualized EBITDA or annualized revenue. Musk’s entire compensation package could end up being worth as much as US$55 billion.
In October, Tesla had amassed a six-month average market cap of US$250 billion, which is the first requirement of the fourth tranche (Cuccinello, 2020). Unlocking this tranche will allow Musk to purchase 8.44 million shares of Tesla stock at US$70 per share, which would be valued at roughly US$3.5 billion dollars, given Tesla’s closing price as of November 18th. It seems that Musk’s fortune is continuing to grow even larger, as he has finally achieved his dream of having Tesla join the prestigious S&P 500 index. Achieving this goal has caused Musk to overtake Facebook’s Mark Zuckerberg as the fourth richest person in the world.
TESLA IS NOW INCLUDED IN THE S&P 500. WHAT DOES THAT MEAN?
The S&P 500 (SPX) is a stock market index that tracks the 500 largest companies trading publicly across all U.S. stock exchanges. Anyone who is invested in the S&P 500 via index funds is essentially buying into every company in the index (now including Tesla), be it in a risk averse way since the index is inherently diversified. To be eligible for inclusion in the S&P 500, companies must be based in the United States, have a minimum market cap of US$8.2 billion, be highly liquid, and have 50% of their shares traded publicly. As well, the company’s recent quarter’s earnings in addition to the sum of the past quarters’ earnings must be positive. Inclusion in the index inevitably brings prestige to the companies included because of its exclusive nature. Additionally, companies included in the S&P 500 are exposed to the benefits of increased demand, as many index funds track the S&P 500 (Ponciano, 2020). It has yet to be released which company Tesla will be replacing on the index.
Following the announcement on Tuesday, Tesla’s stock increased by roughly 8%, bringing the company’s year-to-date gains up to 410% (Ponciano, 2020). As of today (November 18), its price is up 10.2%. The news itself increased Musk’s fortune by nearly US$8.4 billion, which was tracked via the Forbes Real-Time Billionaires web page. Investors initially speculated that Tesla would be added to the S&P 500 back in September, but the index had instead decided to add Etsy (NASDAQ: ETSY) instead. Due to a large number of outstanding shares in the company, Tesla’s inclusion in the index is expected to be completed in parts, with the entire process planned to be finished by December 21st. Tesla’s inclusion in the S&P 500 is likely to boost investor confidence and poise Tesla to continue its massive rally into next year.
WHAT DOES THE COMMUNITY THINK?
Despite Tesla’s continued success, many analysts are somewhat skeptical regarding future performance of the S&P 500 as a result of Tesla’s inclusion, stating that there are considerable risks associated with having Tesla be a part of the index. One major concern of many analysts is the amount of cash Tesla earns from carbon credits paid to them by the government. In Q2 2020, Tesla received US$428 million in “regulatory credits” (Ruffo, 2020). This made up a significantly large portion of the revenues they had earned that year. The amount they earned in carbon credits outweighed the revenues earned from actually selling their vehicles. Without these carbon credits, Tesla would not be nearly as profitable as they currently appear to be, further adding validity to the claim that the company is overvalued.
In addition, Tesla is soon going to face fierce competition from the other major motor vehicle companies. General Motors currently has its own electric vehicle program alongside Ford and Nissan. There are even smaller start-ups that plan to enter the electric vehicle market, some of which are made up of former Tesla employees (Wald, 2020). The threat of new entrants into the market does have the potential to jeopardize Tesla’s position as a leader within the electric vehicle market, as it is very likely for a company to show up and disrupt Tesla’s success in an industry that relies heavily on technological advancement to push it forward. Since the S&P 500 is weighted by market cap, more prominent companies in the index will have a more significant influence on the movement of the index (Wald, 2020). Tesla will be one of the larger companies on the index, having a total market cap of US$461 billion dollars. Any major trouble for Tesla could signal bad news for the S&P 500 index.
Overall, inclusion in the S&P 500 is very big news for Tesla and its supporters alike. The level of prestige attached to the index is likely to help the company continue its rally and provide shareholders with significant returns. Going forward, Tesla should definitely assess and combat the challenges they currently face which may jeopardize future performance and their inclusion in the S&P 500. While his dreams have certainly come true, Musk’s work is far from over, as he has plans to grow Tesla to a scale more unfathomable than it currently is and possibly become one of the biggest companies in the S&P 500.
Cuccinello, H. (2020, November 10). Elon Musk Set To Receive $2.9 Billion Payday After Tesla Reports Strong Quarter. Retrieved November 19, 2020, from https://www.forbes.com/sites/hayleycuccinello/2020/10/26/elon-musk-100-million-stock-options-tranche/?sh=4fccc99602ef
Ponciano, J. (2020, November 17). Elon Musk’s Fortune Surges $6 Billion After S&P 500 Makes Tesla Its Largest-Ever Addition. Retrieved November 19, 2020, from https://www.forbes.com/sites/jonathanponciano/2020/11/17/elon-musk-fortune-surges-5-billion-tesla-joining-sp-500/?sh=3823980e46d4
Ruffo, G. H. (2020, August 10). Tesla Earned $428 Million With Carbon Credits In Q2 2020: Why That’s Bad. Retrieved November 19, 2020, from https://insideevs.com/news/438345/tesla-428-million-carbon-credits-q2-2020/
Wald, E. (2020, November 17). For S&P 500, Tesla Inclusion Is A Risk. Retrieved November 19, 2020, from https://www.forbes.com/sites/ellenrwald/2020/11/17/for-sp-500-tesla-inclusion-is-a-risk/?sh=1d40834575e7