Tesla Gets Trounced by S&P 500 After Three Years

Three years ago tomorrow marked the commencement of Tesla Inc.'s trading on the S&P 500 Index, initiating a tumultuous journey for the company's stockholders. The subsequent ride has raised questions about whether investing in the broad equities benchmark would have been a wiser choice.

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On December 18, 2020, Tesla shares closed around $232, just before joining the S&P 500. Today, they stand at approximately $258, reflecting an approximately 11% increase. In contrast, the S&P 500 has surged by roughly 28%, led by mega-cap technology stocks such as Microsoft Corp., Apple Inc., and Nvidia Corp. Despite being the seventh-largest component in the index, Tesla falls among the bottom half of S&P performers over this three-year period.

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Analyst Craig Irwin from Roth Capital Partners attributes Tesla's underperformance to its initially overinflated valuation upon entering the S&P. He suggests that trading the stock's volatility is a strategic approach to capitalize on the current market conditions.

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Although Tesla's three-year return appears lackluster, it conceals a highly volatile trajectory. At one juncture, the stock soared by nearly 80% from its pre-S&P level, while at another point, it dipped to less than half of that value.

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As Tesla faces potential challenges with cooling demand for electric vehicles, its dominant position in the sector may not be sufficient to buoy its stock price in the years ahead. The euphoric rally leading up to Tesla's inclusion in the S&P 500 tempers the disappointment for some investors. The stock witnessed a staggering 731% surge in 2020 through December 18, driven by expectations of attaining blue-chip status.

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Tesla's entry into the S&P compelled many fund managers, initially wary of volatility, Elon Musk's leadership style, and the nascent electric vehicle (EV) industry, to take notice. For index-tracking funds, purchasing Tesla shares became a mandatory adjustment to reflect the new composition of the benchmark.

Despite the suboptimal returns for passive index investors who entered after the 2020 surge, some investors find value in holding Tesla shares. Jerry Braakman, Chief Investment Officer at First American Trust, notes that changing the starting point slightly reveals the potential value created by holding Tesla.

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The pertinent question now revolves around the market valuation of Tesla, which already surpasses other carmakers and mirrors that of major tech companies. The current consensus on Wall Street suggests little room for further upside. Analysts' average price target implies an expected 6% decline in Tesla's stock over the next 12 months, influenced by projections of diminishing demand for electric cars in 2024 before a potential resurgence.

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The primary uncertainty surrounding Tesla's valuation lies in its bet on "full self-driving" technology. Approximately two-thirds of the company's valuation is believed to be contingent on the success of this technology. However, recent setbacks, including a recall of over two million cars due to concerns about the system's ability to prevent misuse, have introduced volatility. As Nicholas Colas at DataTrek Research sees it, Tesla's valuation and future return are intricately linked to its ability to deliver a truly autonomous vehicle, creating a binary investment case for investors. Those confident in Tesla's autonomous capabilities may continue to hold the stock, while skeptics may remain on the sidelines.