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Analyst on Tesla’s S&P 500 debut: This company will have a ‘bumpy ride’ heading into 2021

Tesla slides in its first day of trading in the S&P 500 Index. Craig Irwin, Roth Capital Analyst joins Yahoo Finance Live to discuss how Tesla will most likely fare in the next few years.

Video Transcript

SEANA SMITH: It's a big day for Tesla, Tesla starting to trade in the S&P, its market cap over $600 billion. That makes it the sixth-largest company in the S&P. For more on this, we want to bring in Craig Irwin. He's a Roth Capital analyst. And Craig, great to have you on the show. Let's just start with Tesla's performance so far today. We have shares off just around 5% right now. So we're under a BIT of pressure. Just what do you think today as it heads into the S&P, what this means for Tesla going forward?

CRAIG IRWIN: So obviously, the buy side is treating this as a negative catalyst, and all the funds-- the index funds that have the opportunity to accumulate in advance of an index edition have basically done so. So many of the funds will be on the sidelines waiting, probably, as long as they can and to accumulate the rest of the shares they have to. Some of them have a month, some of them have a full quarter. And, yeah, it's $80 billion gross in buying.

But, you know, the catalyst is over, and now we have to look back to, is Tesla actually executing? You know, it's being valued as a-- I'm thinking teleportation company, but really autonomous company, full self-driving company. And, you know, are they really executing there? If you look at the videos online from the different users in the beta, I wouldn't say so. I think it's very buggy. So I would agree with the last guest that we probably have a bumpy ride in 2021.

Craig it's Brian Cheung here. I mean, I wouldn't put it past Elon Musk, maybe they will be a teleportation company at some point, at least in aspiration. But I want to ask on that point, then, if the argument is that the news was bought when the index was going to add Tesla as opposed to the day where they actually joined, what's explaining the sell-off going on right now-- I guess, well, not sell-off, but 5% is pretty noticeable. What's going on there?

CRAIG IRWIN: So this is not a surprise. This is something that's been known about for several months. So you see surprise moves to the upside on surprise editions. This is something that's been thoroughly hashed and rehashed and dissected and re-dissected. And, you know, I think it's behind us. So at this point we move back to fundamentals. How big is this fourth quarter, and does it matter for this being a $600 billion market cap company, you know, more than most of the global automotive producers combined?

Do they really operate in a vacuum? Will they really have no competition? Because that's the way the stock's being valued. And, you know, as I've been saying for a long time, I think people are better off in a variety of other alternative names throughout the EV universe.

SEANA SMITH: Craig, going back to what you said before just about volatility, I think the question going forward, yes, we're probably going to see swings like we are today in the stock. But the degree of that volatility, do you think Tesla is going to be as volatile as it has been in the past now that it's in the S&P?

CRAIG IRWIN: I would expect so. I mean, S&P will smooth some of that out, but this is a name that retail loves. And a ton of the managers on the buy side love this, right? Many of them don't necessarily own it in their funds, they own it in their PAs so that they're kind of maybe behaving a little bit like retail. It's a trading stock, so it's a darling. It's a name we love to talk about. It's one that's always entertaining. Mr. Musk is a big personality, so I think volatility stays.

And I think, you know, things that come out on Twitter and from competitors and from the whole spectrum of sources of information are likely to continue to drive good volatility in the stock. I just think, you know, overall, the trend is likely to turn a little bit negative in 2021.

BRIAN CHEUNG: Craig, let's talk about financing for Tesla. I mean, the story about them getting out of the S&P 500 with the S&P's criteria about profitability is a bit, I guess, of a vindication for their performance. But at the same time, we know that they have a lot of outstanding debt. You listed refinancing and repayment as a risk facing their business model going forward. What's the status in where you see their financing angle of things going forward in Tesla's story?

CRAIG IRWIN: I don't see any issue for Tesla around financing. I think if they want to issue equity for plants or expansion or new investment initiatives, there's going to be no hesitation from shareholders. I don't think it's any issue at all for them to raise debt at, you know, rock-bottom levels. You know, Tesla has a lot of options because of their technology leadership, their aggressive first mover position. But it's opening the door for a ton of other companies in the whole sector to pursue financing at attractive rates. And that's why we're seeing some of these SFAC IPOs. That's why we're going to see many more interesting things in autonomous and related technologies in 2021.

SEANA SMITH: Craig, I want to bring up something that you mentioned here in your latest note. You said that future growth in Tesla sales depends on consumer adoption and acceptance of electric vehicles. I'm curious just what you believe to be the potential adoption rates for Tesla going forward, and then some of the challenges that the company could face because of that.

CRAIG IRWIN: So I am on the conservative side versus my peers out there, right? I've been watching EVs for many years. I worked in the battery industry many years ago. And, you know, I think if you take some of the more conservative groups out there, like Ward's Automotive, you know, you're looking at single-digit millions of EVs within the next, you know, give or take, five years. There are others out there that forecast things in the 20s or 30s.

You know, I think this industry will be wildly successful with, say, 5 to 10 million EVs sold. If that's the case, you know, Tesla has-- Tesla has a strong ramp ahead, but maybe not as steep as many would want. And let's remind ourselves, you know, that Tesla is having a hard time making their 500,000 unit bogey for this year. They're doing everything they can. They very well may make it, but it's only half a million units, And it's a 60 million unit global market. They're still a very small piece of the pie.

SEANA SMITH: All right, Craig Irwin, always great to have you on the program, analyst at Roth Capital.

CRAIG IRWIN: Thank you.

SEANA SMITH: Thanks so much for joining the show today.