Shares of cybersecurity specialist CrowdStrike (CRWD 3.97%) are hitting all-time highs today after news broke that the company will be added to the S&P 500 on June 24. And CrowdStrike won't be the only company to enjoy the recognition: Investment firm KKR (KKR 1.73%) and website company GoDaddy will also be added to the S&P 500 that day.
The S&P 500 is an index of roughly 500 of the biggest, most profitable U.S. companies. And given that the number of constituents stays close to 500, there are three companies leaving the S&P 500 on June 24 to make room for the three companies mentioned above. Among those leaving the index is biotech company Illumina (ILMN 2.22%) -- a company that was added to the index in 2015, giving it a relatively short-lived time in the index.
NASDAQ: ILMN
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Joining Illumina on the way out are Comerica and Robert Half, companies that had been in the S&P 500 since 1995 and 2000, respectively.
As of 11:10 a.m. ET, CrowdStrike stock and KKR stock were both up about 10% on this news. Shares of GoDaddy, Comerica, and Robert Half were little moved. But Illumina stock was down almost 5% as investors digested the news.
NASDAQ: CRWD
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What is the S&P 500 doing?
Once a quarter, S&P Global rebalances its indexes, including the S&P 500 index. It looks for which big companies might qualify now that didn't qualify before. And it looks at which businesses have declined and might be too small to consider for this particular index. Changes are also made throughout the year to account for spin-offs, acquisitions, and corporate events that might impact something.
Looking at revenue growth over the last five years, CrowdStrike, KKR, and GoDaddy have grown more than Illumina, Comerica, and Robert Half. This is a simplistic way to visualize how three are becoming bigger businesses at a faster rate, which explains why they're being swapped into the index.
CRWD Revenue (TTM) data by YCharts.
With its stunning revenue growth, it's no surprise that CrowdStrike is now finally considered big and important enough for S&P 500 inclusion. The company only went public in June 2019. But its revenue is up more than 1,000% since it became a publicly traded company. And more importantly for S&P 500 inclusion, its profitability is skyrocketing with the business earning about $43 million in net income in its most recent quarter alone.
On a cash-flow basis, things are even better for CrowdStrike considering it had more than $320 million in quarterly free cash flow.
Investing firm KKR has also produced head-turning growth. It has a diverse business that includes private equity, which seeks to find businesses to buy, improve, and then exit for a profit. Thanks to its growth, KKR's market cap has jumped from about $12 billion five years ago to nearly $100 billion today.
KKR Market Cap data by YCharts.
Does it really matter?
Some investors get really worked up about S&P 500 inclusion and exclusion. And often, there are big moves in stock price right after an announcement -- just see CrowdStrike and Illumina today.
However, not all stocks move equally as evidenced by GoDaddy and Comerica today. To me, this shows that some stocks are simply more popular with stock traders. For this crowd, headlines impact how they're trading shares. But less popular names with more muted trading see little impact.
Traders tend to have short time horizons. By contrast, investors are focused on what will make stocks rise over the long term. And over the long term, stock prices tend to follow business results. Whether a company is included in the S&P 500 is of much lesser importance. After all, the S&P 500 is comprised of both outperformers and underperformers.
Using CrowdStrike as an example, it can continue to outperform the S&P 500 because it has a golden opportunity ahead. Not only is the cybersecurity space huge and growing, but the company has an amazing opportunity within its existing customer base. Its cloud-based platform allows customers to build packages based on their needs, and there are about 20 different modules to chose from.
As of the fiscal first quarter of 2025, only 28% of CrowdStrike's customers had seven or more modules -- profitable revenue growth can continue as they adopt more modules in time.
Moreover, just because they're out of the S&P 500 doesn't necessarily mean Illumina and others will be losers from here. For example, Affiliated Managers Group stock is outperforming the S&P 500 since it was removed in late 2019. Again, it's about the business, not index inclusion.
Therefore, investors for CrowdStrike and KKR are having a good day today whereas Illumina shareholders are having a bad one. But this is in no way a preview of things to come. Businesses that execute well will likely enjoy good stock performance and vice versa. That's what long-term investors should focus on.
