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Analyst: S&P Passed On Tesla Because It's 'Profoundly Overvalued'

Wayne Duggan
·3 mins read

Tesla Inc (NASDAQ: TSLA) shares recovered more of their losses on Thursday after the stock logged its worst day in history to open the week. Tesla shares dropped more than 21% on Tuesday due to S&P passing on including Tesla in the S&P 500 index, a decision that has triggered mixed responses from market analysts.

On Wednesday, DataTrek Research co-founder Nicholas Colas said he was very surprised to see S&P shunned Tesla.

“The S&P 500 Committee’s decision not to include Tesla in the index just yet is about as brave a move as you’ll ever see from this group. It can only have come from a collective and committed view that TSLA is profoundly overvalued and sits on shakier fundamentals than its mega market cap indicates,” Colas wrote in DataTrek’s daily newsletter.

Profitability In Question: GLJ Research analyst Gordon Johnson said earlier this week there were a number of good reasons why S&P didn’t add Tesla. In particular, Johnson questioned Tesla’s valuation, the quality of Tesla’s earnings and the demand outlook for its vehicles.

“Over the past 26 quarters, in only 4 of those quarters, excluding one-time credit sales, has TSLA shown positive net income (these are one-time earnings, according to TSLA, and will fall materially as the bulk of car makers are now making EVs limiting their need to buy credits from TSLA),” Johnson wrote.

Colas has also mentioned Tesla’s heavy reliance on regulatory credit sales as a potential red flag for S&P, which requires all S&P 500 components to be profitable on a GAAP basis.

GLJ has a Sell rating and $19 price target for Tesla.

Etsy Vs. Tesla: Seabreeze Partners President and Tesla short seller Doug Kass said S&P choosing Etsy Inc (NASDAQ: ETSY) to include in the S&P 500 over Tesla is also telling.

“[The] feckless S&P committee that could care less about anything (price, valuation, fundamentals) not only deemed TSLA unworthy, they deemed TSLA so unworthy that ETSY, a tchotchke broker with 1,250 employees, got in ahead of them,” Kass said this week.

Benzinga’s Take: The S&P selection committee may be dragging its heels on including Tesla on hopes that the stock’s valuation will come back to earth at some point, potentially reducing the risk and volatility associated with adding the stock to the index. In the meantime, the committee can justify the delay due to the concerns Colas and Johnson pointed out about the profitability of Tesla’s core auto business without the sale of regulatory credits.

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Date

Firm

Action

From

To

Sep 2020

Oppenheimer

Maintains

Outperform

Sep 2020

Bank of America

Reiterates

Neutral

Sep 2020

RBC Capital

Maintains

Underperform

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