Three years after joining, Tesla’s shares have fallen behind the S&P 500

Three years ago, Tesla Inc. began being traded on the S&P 500 Index and since then, investors have experienced a roller-coaster ride with the company’s stock performance. Tesla’s stock closed at around $232 in December 2020, just before joining the S&P 500, and is now priced at about $258, reflecting an approximately 11% increase. In comparison, the S&P 500 has risen by roughly 28%, driven by mega-cap technology stocks.

Despite being the seventh-largest weighting in the index, Tesla has fallen into the lower-performing half of the S&P. Analysts assert that the initial valuation of Tesla was overdone when it entered the S&P, contributing to the current underperformance.

Looking ahead, Tesla faces challenges as demand for electric vehicles may slow down, and its dominant position in the sector may not be sufficient to bolster its stock price in the coming years. Despite this, the euphoric rally leading up to Tesla’s entry into the S&P 500 has somewhat made up for the stock’s weak performance, as it soared 731% in 2020, drawing significant attention from both institutional and retail investors.

Securing a spot in the S&P 500 compelled many fund managers to take notice of Tesla, resulting in significant buying activity. However, passive index investors who jumped in after the 2020 run-up have not enjoyed great returns due to the stock’s volatility. Yet, some investors believe that holding Tesla could generate value in the long term.

The prevailing belief on Wall Street is that Tesla’s stock may drop by approximately 6% over the next 12 months, reflecting the widespread projection of a decline in demand for electric cars in 2024, followed by a resurgence. The pool of early adopters for electric vehicle technology seems to have been exhausted, and Tesla’s ability to deliver a fully autonomous vehicle is now a critical factor in determining its valuation and potential future returns.

Analysts suggest that about two-thirds of Tesla’s valuation hinges on the success of its “full self-driving” technology, but recent setbacks, such as the recall of over two million cars due to the system’s inadequate ability to prevent misuse, have magnified the uncertainties surrounding this technology. As a result, investors’ confidence in Tesla’s ability to achieve fully autonomous driving capabilities will play a decisive role in their investment decisions.

In summary, Tesla’s journey in the S&P 500 has been filled with highs and lows, and the company’s future prospects are subject to various market and technological factors. True to the automotive industry’s reputation for change and progress, challenges and uncertainties abound, determining the stock’s performance in the years to come.