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Tesla's Inclusion Will Not Make S&P 500 More Expensive, Goldman Analysts Say

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Tesla's Inclusion Will Not Make S&P 500 More Expensive, Goldman Analysts Say

Tesla Inc (NASDAQ: TSLA) becoming a member of the S&P 500 index on Monday will not have a large effect on the valuation of the benchmark, as per Goldman Sachs analysts.

What Happened: According to Goldman strategists led by David J. Kostin, the addition of the Elon Musk-led company to the index would have a minimal impact on the valuations because of nuance in the index metric calculations, CNBC reported Thursday.

Tesla is trading at 167 times earnings currently, as per FactSet data. Apple Inc. (NASDAQ: AAPL) and Amazon.com Inc. (NASDAQ: AMZN), two other stocks that see high-interest, are trading at 31 and 72 times earnings, respectively, CNBC noted.

The Goldman analysts said — with Tesla’s large size and elevated multiple — investors think wrongly that the company’s inclusion in the S&P 500 will elevate the index's 22x P/E ratio by “two multiple turns or more.” Instead, the inclusion will “lift the index P/E ratio by just 0.4 multiple turns.”

“The inclusion will lift the aggregate index P/E multiple by slightly less than 1.5%, or less than half of a P/E multiple turn," Kostin said, as per CNBC. "This impact would be similar whether the stock traded at a P/E multiple of 170x, 500x, or 1000x.”

Why It Matters: Goldman explained that even though S&P 500 constituents are weighted as per their free float cap, index metrics treat the benchmark as a sum total of its individual constituents instead of a cap-weighted average.

Kostin said the addition of the automaker to the index would have a "meaningful impact" on its performance.

The investment bank said had Tesla been a constituent all year, the total index return would have been higher by nearly 200 basis points from 16% to 18%.

Tesla has outperformed the S&P 500 by roughly 640 percentage points.

This month, Goldman upgraded Tesla from Neutral to Buy and raised its price target from $455 to $780.

Price Action: Tesla shares closed nearly 5.3% higher at $655.90 on Thursday and fell 1.2% in the after-hours session to $648.

Related Links: Can Tesla's Dizzying Valuation Ahead Of S&P Inclusion Last? Analysts Are Divided

Click here to check out Benzinga’s EV Hub for the latest electric vehicles news.

Latest Ratings for TSLA

DateFirmActionFromTo
Feb 2021Morgan StanleyMaintainsOverweight
Feb 2021Piper SandlerMaintainsOverweight
Jan 2021Deutsche BankMaintainsBuy

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