July 27, 2020
Last week Tesla reported its fourth consecutive quarter of positive earnings, a first for the upstart electric vehicle manufacturer. This feat makes the company eligible for inclusion in the S&P 500 index, a coveted position that has eluded the company since its founding in 2003. While I do not want to get into the investment merits of the company, that would be a much longer debate, I found it particularly striking that should the stock be included in the S&P 500, it would be the largest company at the time of admission. It would not only be the largest but following the stock’s 500% rally so far this year, it has the potential to be included as the 15th largest holding! While this says something about Tesla, I believe it also says a lot about the index itself.
As I have noted in our Weekly before, the spoils of the stock market have skewed to an increasingly select group of companies since 2015. These immediately recognizable names: Facebook, Apple, Alphabet (Google), Amazon, Netflix, and Microsoft (collectively known as the FAAANMs) have outperformed their peers by an extraordinary measure over the last cycle. For reference, at Tesla’s current market cap (approximately $268 B), it would have been the 4th largest company in the world 10 years ago, smaller than only Exxon, PetroChina, and Apple! So, how could a car company that has only just accomplished four consecutive quarters of profitability possibly be one of the largest companies in the world by market cap?
The factors contributing to such out-performance in the FAAANM group may, in part, explain Tesla’s recent record breaking achievement. These select companies have recently outmatched competitors like IBM by having an almost sniper-like focus on the end-user: the average global citizen who keeps up with old friends on Facebook, buys a new phone every few years, and a new car every decade or so. The interconnected nature of our global economy, along with rising incomes in many parts of the world, has created a truly massive market for technology consumption. A new phone can sell millions of units around the globe within 24 hours, and your new favorite Netflix show can reach audiences at McMurdo Station in Antarctica at the same time as Times Square in New York. Massive shifts in demand and the way we consume technology continues to make lasting impacts on companies like Exxon (the largest ten years ago), where advances in electric vehicle technology has increasingly disrupted the demand for fossil fuels.
This brings us back to Tesla and how it fits into this select group. Some will call it just another premium car company, analysts will tout their advancements in battery technology, and others will focus on the impressive work they do in solar technology. But, at the heart of all of this is Tesla’s commitment to engineering the best tech in the world. While Tesla’s self-driving software Autopilot doesn’t make their cars fully autonomous yet, founder Elon Musk plans to deploy one million “robo-taxi” vehicles for a ride share network by the end of 2020. Who wouldn’t want a car with a “brain” trained by trillions of real-world data points that aims to predict the behavior of other drivers and keep you safe.