Tesla (NASDAQ: TSLA) It inspires both loyal followers and devout haters, but the action’s success is indisputable. Since going public 10 years ago, it has provided incredible benefits to its first shareholders. It has also created an impressive company with a growing customer base, an expanding addressable market and high aspirations.
Now that Tesla has reached profitability, it is now only a matter of time before receiving an invitation to join the S&P 500 Index (SNPINDEX: ^ SPX). However, although admission to that club is largely based on objective criteria, the same is not true for Dow Jones Industrial Average (DJINDICES: ^ DJI). As crazy as it sounds, there is an increasingly compelling case for Tesla to join that elite band of 30 companies. Dow These are some of the best reasons why.
Image source: Tesla.
1. An industrial average needs an automobile company
As the name implies, the Dow initially focused on industrial companies, and for more than a century, the auto industry was represented on average. That began with the admission of the American Car and Foundry Company in 1901, and on several occasions, companies such as Studebaker, Nash Motors, and Chrysler were members of the Dow.
The oldest automobile company in the Dow was General Engines (NYSE: GM), which had an uninterrupted membership from 1925 to 2009. However, its bankruptcy after the financial crisis led to its elimination. Since then, the Dow has spent more than a decade without representation from the auto industry.
Many investors point out that Tesla’s potential goes far beyond its vehicle manufacturing. For now, however, Tesla is directly focused on cars and trucks. That makes it an industrial stock, and putting it in the Dow would make the average more industrial once again.
2. Tesla’s market capitalization would place it in the top 10 among Dow stocks
There are no market capitalization requirements for admission to the Dow, as index managers generally look for companies that are representative of the overall economy rather than simply choosing the largest companies available. However, Tesla’s market capitalization has flirted with $ 300 billion recently, and that establishes the automaker as a leader in its field.
If Tesla were in the Dow, it would be among the 10 companies with the highest market limits. It’s also almost nine times more valuable than Dow’s shares with the lowest market capitalization, and would have a safety margin of nearly $ 100 billion just to keep it out of the bottom half. Even those who argue that a correction to Tesla’s stock has been long overdue have to admit that the size of the company currently warrants giving consideration to the industrial index.
3. The only real barrier is easily repairable
Almost the only reason Tesla should not Being in the Dow right now is that the average uses a price-weighted methodology to calculate its level. Because its share price has risen well in four-digit territory, Tesla would have a much higher weighting in the Dow than any other share.
However, there is a precedent for companies with high share prices taking steps that eventually made their way to the Dow easier. In the mid-2010s, Apple (NASDAQ: AAPL) Shares climbed to high triple digits, which would have kept the iPhone giant out of the Dow. So Apple did a 7-for-1 stock split that lowered its share price to a much more manageable level.
A similar 7-for-1 split would put Tesla shares in the $ 200 to $ 250 range based on recent prices. That would give it a substantial weighting on the average, but not an overwhelming one. If Tesla were to do a 10-for-1 stock split, it would be right in the middle of the index package in terms of stock prices.
Do not hold your breath
Objectively, there are compelling reasons why Tesla deserves a place on the Dow Jones Industrial Average. Practically, however, the move seems unlikely. The Dow represents old-school Wall Street in a way that CEO Elon Musk would probably reject.
Eventually, Tesla may still be able to receive an invitation. But Dow investors are much more likely to have to run out of a stock of cars in the index for a while longer.
