What happened
Shares of renewable-energy company Tesla (TSLA -3.40%) surged to all-time highs on Tuesday, and the reason isn't obvious. CEO Elon Musk sent out an email to talk about "breaking even," reminding Wall Street this stock may be mere weeks away from inclusion in the S&P 500.
As of 2:00 p.m. EDT, Tesla stock was up 6.5%. But earlier in the session, it was up a little higher and briefly achieved a market capitalization of $200 billion for the first time.
So what
Once a quarter, a committee adjusts the S&P 500. New companies are often added while others are removed. To be considered, companies must meet various eligibility requirements. Tesla already meets some requirements, like being based in the U.S. and having a price per share over $1. But it's lacked profitability.
Four consecutive quarters of profitability are needed to be considered by the committee. Tesla has reported three consecutive quarters. Considering it's already a large-cap stock headed into mega-cap territory, a fourth consecutive quarter of profits would make it a shoo-in for inclusion into the S&P 500.
According to CNBC, a leaked email from Musk encouraged employees to "go all out" because "[b]reaking even is looking super tight." Without more context, it's hard to know what this means. But it appears Musk needs more productivity from his workers down the stretch of the quarter to be profitable. And Musk is likely aware of what's at stake if the company swings to the green.
As a reminder, Tesla's fiscal quarter ends today, providing a small window of opportunity.
Tesla stock is reaching new all-time highs. Image source: Getty Images.
Now what
So why would investors be excited about Tesla getting included in the S&P 500? Tesla is a polarizing stock, with passionate investors on both sides. At times, this makes Tesla stock volatile. Consider that it's up over 150% in 2020, but it also fell more than 60% from February to March. That's a wild ride.
Once in the S&P 500, that volatility could mitigate. Tesla stock will be purchased for index funds, and as long as it's in the club, those shares won't be sold. It could create a floor for Tesla stock. However, while it's an interesting development for Tesla shareholders, it doesn't make the stock a buy in isolation. Investing in stocks for the long haul requires a good assessment of the underlying business as well.
