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Joining the index would bring the prestige of belonging to the benchmark gauge of U.S. equities and drive index funds to race to include the company’s shares in their holdings.
Inclusion in the S&P 500 requires an accumulated profit over four consecutive quarters. With Tesla’s profit over its past three quarters—its longest run of profitability—it may be able to join the influential index if it can defy Wall Street’s expectation and eke out another this period.
The connection could help explain why Mr. Musk was so determined to reopen the plant, which had been idled since March 23 by local authorities trying to stem the spread of Covid-19, the disease caused by the new coronavirus.
Analysts and other observers have puzzled over why Mr. Musk pushed so aggressively to restart the Fremont, Calif., factory a week earlier than local authorities anticipated—including filing a suit in federal court against the local authority that ordered Tesla not to ramp up and daring authorities to arrest him (they didn’t). Mr. Musk has complained that competing car makers in other states were being allowed to reopen when he wasn’t.
“I don’t think reopening a week or two later than the Detroit three or transplants matters much in the long run, but it will matter for [second-quarter] results,” said David Whiston, an analyst for Morningstar Research Services.
Mr. Musk didn’t respond to a request for comment. Earlier this month he surprised investors by saying he thought the company’s stock was too high, sending shares sharply lower only for them to rebound in the following days. He didn’t explain why he felt shares were overvalued.
On its face, generating a profit in the April-to-June period might seem improbable, given Tesla’s lone U.S. car plant was idled for about half that time. Analysts surveyed by FactSet predict Tesla will report a loss of $387 million after deliveries fall 31% from the first quarter to 67,000.
Tesla got close to meeting the S&P 500 profit requirement already with its first-quarter results, but it fell short of a cumulative four-quarter profit by about $144 million, with a $16 million profit that wasn’t enough to offset losses in the second quarter a year earlier. Its most recent quarter also must be profitable, along with other requirements, for the S&P 500 to consider adding the company. A spokesman for the index declined to comment on an individual company.
Investor Gary Black, who has been long on Tesla since 2019 and is the former chief executive of Aegon Asset Management, says reopening the plant could help Tesla eke out a $2 million profit for the second quarter. That is based on his estimates for delivery of 80,000 vehicles helped by results in China and a backlog of inventory that didn’t make it customers at the end of the first quarter, when the pandemic shut down much of the U.S. and Europe.
A profit, he bets, will trigger Tesla’s inclusion in the S&P 500. “I think it’s 75% likely Tesla generates a GAAP profit of at least $1 in 2Q, and if that happens, it’s 100% likely S&P would add Tesla to the S&P 500,” he said in an email.
Inclusion in the S&P typically brings a rally for a company’s stock, though the gains don’t necessarily last long. Stock performance for companies added to the index between 1973 and 2018 usually fell behind the S&P a year after inclusion, according to Ned Davis Research.
Tesla’s stock price more than doubled in 2020 through Feb. 19, when it closed at $917.42 a share—giving it a market value of more than $170 billion—before falling as the coronavirus pandemic hit the U.S. and roiled markets globally. After Tesla posted a surprise first-quarter profit in late April, its shares rallied. It again hit a $150 billion market value on May 8—the day Mr. Musk said he was recalling workers to the Fremont factory. Tesla shares finished trading Friday at $799.17, giving the company a value of $148.1 billion.
Mr. Musk has a history of surprising Wall Street, sometimes by triggering accounting levers not linked directly to car sales. Tesla’s surprise profit in the first quarter, when analysts expected a loss, was aided by a surge in the sale of tax credits that helped offset the drag on vehicle sales from the coronavirus pandemic.
This quarter, Tesla has been pushing landlords for rent breaks that could bolster its bottom line. It also furloughed workers without pay, while also temporarily cutting salaries of others.
With work at Fremont now resuming, Tesla could enjoy about seven weeks of production as long as suppliers—some with their own plants shut by local restrictions—can deliver parts in time. Tesla’s only other assembly plant, in China, has been churning out cars for much of the quarter after a brief Covid-19-linked pause earlier this year. Any results are contingent on customers wanting cars, which isn’t a certainty amid fears of an extended recession.
Tesla’s China performance, where its local plant started delivering Model 3 cars in December, could be pivotal to its financial performance this quarter. Tesla sales rose strongly in the market even as rival car makers were hard hit.
Tesla has orders in hand for future car deliveries, the company’s head of investor relations, Martin Viecha, told Deutsche Bank, according to Deutsche analyst Emmanuel Rosner. “Tesla’s record backlog of orders should provide a strong pipeline of deliveries regardless of near-term conditions,” Mr. Rosner wrote to investors last week.
Barclays PLC analyst Brian Johnson doubts Tesla can stay in the black this quarter. He estimates the China factory probably will make 39,000 vehicles in the period and Fremont will produce an estimated 24,000 Model 3s during the period, as it will take several weeks for the factory to return to a more normal rate of building vehicles. The one extra week Mr. Musk pushed for is “not enough to swing” a profit, he said.
Even if that happens, Mr. Musk may not have to wait long to knock on the S&P’s door. If Tesla posts a loss in the second quarter, a rapid rebound in the third could still propel the car maker to its cumulative goal. Analysts expect profitable third and fourth quarters to bring Tesla a total annual profit of $190 million.