Tesla shares slump after S&P 500 snub, $5 billion stock sale

Patrick

Aurich Lawson

Shares of Tesla opened at $356 on Tuesday morning—down about 15 percent from Friday’s closing price. The decline capped a rough week of trading for the carmaker. A week ago Tuesday, Tesla shares opened slightly above $500, a new record. They have been sliding ever since and are now down about 30 percent from last week’s highs.

To be fair, those losses have merely put Tesla’s stock back to the level it last reached in mid-August. Tesla stock soared in the second half of August after the company announced a five-for-one stock split on August 11. The value of Tesla’s shares is still about four times what it was on January 1.

Snubbed by the S&P 500

Several factors seem to be weighing on Tesla’s share price. One is the decision not to include Tesla in its influential S&P 500 index.

The S&P 500 is supposed to be an index of large companies, and Tesla’s market capitalization is now far higher than others included in the index. For example, Etsy was just added to the index despite having a value that’s about 25 times smaller than Tesla’s. The committee in charge of the S&P 500 has not explained why Tesla has been left out.

The snub matters because a lot of people have their savings invested in S&P 500 index funds that mirror the composition of the index. So when a company is added to the index, index funds have to buy shares in the company, putting upward pressure on the price. Markets may have been pricing in the likelihood of Tesla becoming part of the S&P 500, leading to a price decline when that didn’t materialize.

$5 billion in new Tesla shares

Another factor weighing on Tesla’s shares may be last week’s massive $5 billion stock offering. The offering was announced last Tuesday and a new regulatory filing says that Tesla successfully completed it on Friday.

A flood of new shares sometimes causes a company’s stock price to fall. But not always. When Tesla raised $2 billion from the stock market in May 2019, Tesla’s stock ended the day up 4 percent. Investors might be enticed to buy more shares if they believe the new money will improve the company’s prospects for growth.

Ultimately, week-to-week fluctuations in Tesla’s stock price won’t matter very much for the company’s long-term future. The big challenge is to put Tesla’s freshly raised $5 billion to work designing new vehicles and building new factories.

If Tesla can dramatically boost output—and find buyers for all the new cars—it might be able to justify its soaring market valuation. In that case, the S&P 500 will need to include Tesla in its index sooner or later.

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