Tesla shares have lagged behind the overall S&P 500 three years after joining

Exactly three years ago tomorrow, Tesla Inc. finally started trading on the S&P 500 Index. Since then, the company’s stockholders have been on a wild ride that’s left them wondering if they should’ve just put their money in the broad equities benchmark.

Tesla shares closed around $232 on Dec. 18, 2020, the session before the company joined the S&P 500. Today they’re about $258, a roughly 11% increase. Meanwhile, the S&P 500 has climbed roughly 28%, led by mega-cap technology stocks such as Microsoft Corp., Apple Inc. and Nvidia Corp. Tesla, which has the seventh-largest weighting in the index, is among the bottom half of S&P performers over that time.

“Tesla’s valuation was way overdone when they went into the S&P, so it is no wonder the shares are underperforming and will likely do so for the next couple years,” Craig Irwin, an analyst at Roth Capital Partners, said in an interview. “Trading the volatility is the right strategy to make money in the stock currently.”  

Indeed, Tesla’s lackluster three-year return masks a highly volatile run. At one point, the stock was up nearly 80% from its price right before joining the S&P, while at another it was less than half that value.

Rally covers wounds

Looking ahead, conditions could get even more challenging for Tesla as demand for electric vehicles cools. Even the company’s dominant position in the sector, which makes it perhaps the only viable bet for investors in the industry, may not be enough to help its stock price in the coming years.

Still, the euphoric rally that preceded Tesla’s entry into the S&P 500 makes the stock’s weak showing palatable to some investors. The shares rose a staggering 731% in 2020 through Dec. 18 as expectations that the company would soon gain blue-chip status lured both institutional and retail investors.  

Getting a spot in the S&P meant many fund managers who were wary of the volatility, the company’s flamboyant and unpredictable chief executive officer, Elon Musk, and the nascent EV industry had to take notice. And for funds tracking the benchmark, portfolio managers were required to buy Tesla shares to reflect the index’s new makeup. 

“Passive index investors jumping in after the run-up in 2020 have not had a great return considering the volatility,” said Jerry Braakman, chief investment officer at First American Trust, which held about 16,000 Tesla shares as of Sept. 30. But “change the starting point just a little and it is obvious how much value can be created by holding Tesla.” 

The question from here is how much room there is left in a market valuation that already towers above other carmakers and resembles the biggest tech companies.

Autonomous future

Wall Street’s current consensus seems to be: maybe none.  

Analysts’ average price target on Tesla reflects an expectation for the stock to fall about 6% over the next 12 months. That’s not surprising, given that demand for electric cars is widely projected to fade in 2024, before picking up again. 

As auto companies including Tesla, EV suppliers and even car-rental companies have said in recent months, it appears that the pool of first adopters for the technology has been tapped out, and a mix of questions around the economy, expensive vehicles and high interest rates are keeping mainstream buyers away.

And then there’s the hope that Tesla will be able to build a truly self-driving car before anyone else does. 

As Nicholas Colas at DataTrek Research sees it, about two-third of the company’s valuation hinges on the success of its “full self driving” technology. But that has seen some stumbles. The most recent setback came last week when Tesla said it will recall over two million cars after the top US auto-safety regulator said the system doesn’t do enough to prevent misuse.

“Tesla’s valuation and therefore volatility and potential future return is inextricably linked to its ability to deliver a truly autonomous vehicle,” Colas said. “Investors who think that’s going to happen will own the stock. Those who doubt Tesla can get to that finish line first or second won’t. It’s a pretty binary investment case at this point.”