Bloomberg
When Tesla joins the S&P 500, you know it’s over
(Bloomberg opinion) – In an anecdote often attributed to President John F. Kennedy’s father, the time he knew he was getting out of the stock market boom of the 1920s was when he started getting stock advice from his shoe shine. You can make a similar argument about when the major stock indices finally give their blessing on an emerging stock. The latest and most dramatic example of this will happen next month, when the S&P 500 admits Tesla Inc. through its club doors for the first time Get Yahoo Inc. The dotcom business archetype has entered the major stock index American in December 1999, just four months before an Internet stock crash that took more than a decade to recover from the United States. New admissions in the mid-2000s were filled with real estate games like CBRE Group Inc., Boston Properties Inc., and Kimco Realty Corp. Those companies were then hammered by the subprime and financial crisis of 2008. Will this time really be different? To be sure, it appears that Tesla is on a firmer footing than it was two years ago, when regulators filed fraud allegations against Elon Musk and the company was, in his words, “a figure weeks” away from bankruptcy. The rise to the S&P 500 had been predicted ever since Q2 results marked a fourth consecutive period of profit, surpassing a crucial criterion that keeps many startups out of the index. is faring even better. The inflow of $ 2, 4 billion in the third quarter alone was higher than total operating liquidity in the decade to September 2019. The auto industry as a whole appears to be performing remarkably well in the grip of Covid-19, with auto and S&P shares index Monday has reached its highest level in more than two years. Tesla is already the 11th largest company by market capitalization on the US stock exchanges, worth about as much as the three largest automakers in the United States. l world Toyota Motor Corp., Volkswagen AG and General Motors Co. together. Casual investors are likely to see their index-tracking funds turn them into indirect Tesla shareholders, whether they want to or not. So what’s wrong? The persistent question is about evaluation. Tesla has passed the point where it is in imminent risk of death, but it is still very difficult to justify the price put on the exchange. Returns on equity are only rising with even the broader automobile sub-index. Even analysts estimate that rising north by 20% over the next few years will bring them only in line with what were until recently considered normal levels for an industry that has been out of favor with investors for years. performance is hard to match with Tesla’s incredibly expensive stock. The median price of the S&P 500 components is 20.89 times the combined 12-month earnings. Tesla’s P / E ratio is 113, which would be enough to give it the richest rating on the index after Under Armor Inc., Boeing Co. and SBA Communications Corp. Comparing forward EBITDA to corporate value, only six companies have Tesla’s highest ratings is 49.51 times multiple and it is very difficult to see how Tesla will be able to justify these long-term ratings. This is the case even if you agree with the most optimistic analysts and assume that the company will produce about $ 10 billion a year in net income by 2022 or 2023, up from $ 556 million over the past 12 months. Based on these numbers, a 20x price-earnings multiple would yield a business worth not much more than half of Tesla’s current $ 387 billion market capitalization – that’s the real lesson for newcomers to the large indices. For every Yahoo or AOL Inc. that turns into a parable of excess market, there is a Kimco or CBRE that survives but never takes back the magic that propelled it to the fore. Yahoo’s advertising campaign in 1999 eventually fell victim to the best search technology developed by a then little-known startup called Google. The race to dominate electric vehicles over the next decade is unlikely to be less competitive. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. David Fickling is a Bloomberg Opinion columnist dealing with commodities as well as industrial and consumer companies. He has been a journalist for Bloomberg News, Dow Jones, Wall Street Journal, Financial Times and Guardian.For more articles like this, visit bloomberg.com/opinion Subscribe now to stay on top of the most trusted business news source © 2020 Bloomberg LP
