Tesla’s stock is a phenomenon. Here’s why it’s not in the S&P 500

With the recent stock-price surge, Tesla has become one of the most valuable companies in the United States. But it’s still missing from the S&P 500 index, the collection of large-cap stocks meant to give investors a chance to buy into the nation’s blue-chip companies.

The reason is simple: It hasn’t been profitable long enough.

Even with a big drop on Wednesday, Tesla’s market value stands at about $132 billion, easily among the 100 largest US companies. It has nearly the same market value as United Technologies, a Dow component, and is significantly larger than several other components including General Electric, Goldman Sachs and American Express.

S&P Dow Jones Indices won’t comment directly on Tesla’s exclusion from the index to date, but the guidelines it has about components clearly indicate that Tesla still falls short in the profitability criteria.

While companies can, and often do, lose money without being booted out of the index, a company should show some kind of sustained profitability before it is added, according to S&P.

“The sum of the most recent four consecutive quarters … earnings should be positive as should the most recent quarter,” the S&P’s guidelines say.

Tesla posted an annual adjusted profit for the first time in 2019, although it was not profitable for the full year under the strict accounting rules considered by S&P.

It did pass that more stringent test of profitability in the third and fourth quarters of last year. But it still would need to see at least one, maybe two, more quarters of profits using those stricter rules in the first part of this year to be included in the S&P 500. In its most-recent earnings report, Tesla predicted it will be consistently profitable going forward.

Whether or not Tesla is added to the S&P 500 matters, and not just because investors use it as part of their large-cap investment strategy through the purchase of ETFs or index funds. If and when Tesla is added to the index, it will provide another lift for the stock.

Those who manage index funds and ETFs based on the S&P need to keep their holdings in line with the 500 companies that make up the fund. So when a company is added, it invariably lifts the stock as those managers are forced to quickly buy a large number of its shares.