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Tesla falls on S&P 500 debut – is this the end of its meteoric rise?

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Elon Musk
Elon Musk

Investors have begun ditching electric car giant Tesla as it becomes a member of the S&P 500 index with a 1.7pc weighting from today.

Its inclusion on the S&P index makes Tesla the sixth largest company in the flagship US stock market index and its shares will now be bought by funds that track the S&P. Shares have risen nearly 700pc this year and 33pc since S&P announced its inclusion, but investors have started taking profits.

Shares opened 4pc down on Monday morning, at $666, and continued to slip to end down 6.5pc by close. 

Now that it is finally in the index, does this mean that the hype around the stock will subside

Susannah Streeter, of fund shop Hargreaves Lansdown, said Tesla’s price surge leading up to its inclusion made sense as funds were forced to buy billions of dollars of Tesla shares, but now the share price had risen well ahead of the company’s real value.

“The company fundamentals haven’t changed so car sales need to really accelerate to justify its huge valuation. There was a big improvement in its last financial results, but the current share price of $695 means it really needs to deliver something special in 2021,” she said.

S&P largest companies
S&P largest companies

The challenge for investors, she added, was that it is hard to value “growth” companies like Tesla. “On paper Tesla does not deserve its valuation, but it has lots of ‘intangible’ assets like its software, driving data, engineers and brand,” she said.

Nevertheless, she advised investors to continue taking profits and hold Tesla as part of a diversified portfolio, such as in an S&P 500 tracker fund, rather than as a large single share holding.

“There is bound to be a price correction, but it is impossible to know when,” she said.

Tesla’s shares are overvalued and should be worth $306, rather than the $695 they trade at today, according to David Whiston, of financial research group Morningstar.

“Tesla has a chance to be the dominant electric vehicle firm in the long term and is a leading autonomous vehicle player, but we do not see it having mass-market volume this decade.

“Investing in Tesla comes with tremendous uncertainties due to the future of electric vehicles and energy storage. In a recession, investors may not want to hold the stock of a firm whose story will not play out until next decade,” he said.

S&P trackers
S&P trackers

Mr Whiston added that if chief executive and founder Elon Musk left the company, shares could plummet as Tesla's fate is closely linked to Musk’s actions. “We see immense key-man risk for the stock,” he said.

William de Gale, a technology specialist at investment manager BlueBox, said Tesla the S&P inclusion played in to the hype around the company but would no longer spur its share price higher.

“Its inclusion was a one-off event and now it’s done. It is time to take some profits and use the cash for something concrete, such as paying off part of a mortgage. Tesla is changing the world, but I would rather invest in boring companies companies which are less volatile and more profitable.”