Tesla, Index Inclusion & BMW

As Al Root noted in Barron’s November 25, 2020, Tesla Stock Rises Again, Creating Another Problem for Index Funds, at the current valuation Tesla will be entering the S&P500 Index with a market cap roughly equivalent to Warren Buffett’s Berkshire.  As Al explains, this will require index funds to purchase $70b of Tesla stock. The stock has risen 586% YTD with 41% of that coming post the announced inclusion.

At over 900x earnings, we cannot help but wonder if this is a poor time for a vast swath of Americans using index funds to be allocating such a large chunk of their money to Tesla. While Tesla has done a fantastic job capturing the imaginations of many, the charts below compare Tesla to BMW, one of the most established and profitable car makers in the world.

One does not need to be a believer in value investing to see the possible risks in Tesla’s current valuation!

Tesla vs. BMW: Market Cap, Revenues & Profits

 

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