Tesla on Track to Join to S&P 500: Macquarie

Electric vehicle industry pioneer Tesla Inc. (TSLA) is on track for consistent profitability by the second half of next year, and will be included in the S&P 500 index sooner than later, according to one team of bulls on the Street.

Posting Sustainable Profits Is Tesla's Last Step to S&P 500 Eligibility

In a note to clients on Thursday, analysts at Macquarie wrote that the Palo Alto, Calif.-based automaker "checks all the boxes" except for one to allow it from joining the S&P 500, as outlined by MarketWatch.

While Tesla has maintained a market capitalization that distinguishes the company as one of America's 500 most important publicly traded companies, its inability to secure continued profits has held it back from inclusion in the index.

In Q3, Tesla posted a profit of over $300 million, causing the highly volatile stock to surge as investors cheered progress in the production of its first mass-market vehicle, the Model 3 sedan. CEO and founder Elon Musk, who has received mounting criticism from bears who view his nontraditional management style and high profile presence on platforms like Twitter and popular podcasts, says his firm is set to maintain profitability after a milestone quarter.

Macquarie's Maynard Um noted that the S&P 500's methodology requires that the sum of a firm's four most recent quarterly earnings, as well as the most recent quarter, must be positive.

"While (Tesla) still has to prove it can sustain profitability, we believe the company will achieve this last eligibility requirement driven by steady demand for Model S & X, increasing production to meet Model 3 demand, and potential for meaningful (Zero Emission Vehicle) credit revenue,” wrote Um.

What's Next for Investors

The Macquarie analyst did acknowledge the fact that even if Tesla succeeds in checking off all the boxes, the S&P does not disclose how it decides whether a stock is added to the index after that.

Ultimately, the prospect of Tesla joining the S&P 500 should serve as a major tailwind for the EV pioneer, paving the way for new investment from funds that track the large-cap benchmark or have restrictions on which equities they can add to their holdings. Um looked at the 12 stocks most recently added to the index, noting that while their performance was varied, those not previously included in the S&P Mid Cap, which Tesla is also not a part of, saw an average stock price gain of 6.9%, compared to a 0.2% return for the S&P 500 on the day of the announcement.

While many loyal Tesla fans and younger investors already view the company as a significant business with massive disruptive potential, the S&P 500 inclusion should work to draw in more skeptical investors who have not yet shifted their perception of the auto company as a niche startup.

Um, who rates Tesla at buy, expects the stock to gain 25% over 12 months to reach $430. Tesla stock is trading down nearly 2% on Monday morning at $343.83, reflecting a 10.4% increase YTD compared to the S&P 500's 3.4% return.

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