Is Tesla Too Big for the S&P 500?

On Wednesday, Tesla reported blockbuster second-quarter earnings that exceeded Wall Street's expectations. They also showed the automaker's fourth consecutive quarterly profit, the last milestone it needed to meet to be considered for inclusion in the popular S&P 500 index.

Some think Tesla's addition to the index is a foregone conclusion, including Wedbush analyst Daniel Ives, who wrote in a Thursday note that it's “likely a done deal.” But, simply accomplishing the criteria for inclusion to the index doesn't mean that the company will be added.

To be included in the S&P 500, companies must be US based, trade on the New York Stock Exchange, Nasdaq, or Cboe, have a market capitalization of at least $8.2 billion, and report four consecutive quarters of profit according to US generally accepted accounting principles (GAAP.)

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Now that Tesla has met the S&P 500's eligibility requirements, it will be added to a pool of other eligible candidates and considered for inclusion when an opportunity presents itself, a spokesperson for S&P Dow Jones Indices told Business Insider.

An opportunity would include if a current S&P 500 company no longer meets eligibility criteria due to a merger, acquisition, or significant restructuring. Companies can also be deleted from the index if they substantially violate one or more of the eligibility criteria, according to S&P.

If such an event arises, a group called the Index Committee will take several factors into account when selecting a new member to join the index, including sector balance and size representation, the company said.

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The Index Committee is made up of full-time, professional members of the S&P Dow Jones Indices staff. The committee meets on a monthly basis, and the index is rebalanced quarterly.

Regardless of this schedule, however, the committee can add or remove companies at anytime, according to the S&P spokesperson. When the committee does add or remove a company, it makes a public announcement outlining the changes.

Adding Tesla to the index could present some unique challenges due to its size. Tesla would be the largest-ever company to be added to the S&P 500, based on its market capitalization of roughly $281 billion at market close on Thursday.

Shares of Tesla have gained more than 260% year-to-date.

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