Here’s one possible reason why Tesla wasn’t added to the S&P 500

September 8, 2020, 6:12 PM UTC

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It’s not a great day to be a Tesla bull.

In a move that surprised the Street on Friday, Tesla was not added into the S&P 500 index—instead passed over for Etsy, Teradyne, and Catalent. And investors are clearly showing their dismay: Tesla’s stock was down over 17% in midday trading on Tuesday.

Morningstar’s David Whiston, for one, is “not surprised” by Tesla’s S&P snub and speculates that “Tesla has a quality of earnings issue around being profitable often with the help of emission credit sales. The index is market cap weighted, so Tesla qualifies easily in that regard. But perhaps the committee is concerned about the stability of Tesla’s earnings, and that caused them to want to wait a bit,” Whiston tells Fortune via email.

In fact, in Tesla’s most recent quarter, sales of regulatory emissions credits accounted for roughly 7% of the company’s $6.04 billion in sales.

JMP Securities’ Joseph Osha notes that while the second quarter was “widely reported as a beat,” the “reason for that beat was pretty much entirely the fact that those zero emissions credits came in higher than expected. It’s not as if it’s somehow bogus…But the perception last quarter wasn’t great that that was where the beat came from, and I guess it would be nice if [Tesla] could give us some better sense as to how those numbers should track,” he tells Fortune.

Even longtime Tesla bull Dan Ives at Wedbush Securities argues that while “there’s a range of areas where the decision committee ultimately decided not to include them this time,” the most likely is “GAAP profitability and sustainability of that metric given so many moving parts,” he tells Fortune. “It’s a ‘prove me’ situation in terms of S&P.”

But those like Ives and JMP Securities’ Osha believe Tesla will prove itself in coming quarters. Osha tells Fortune he believes “the concerns about profitability are going to evaporate, and the people who make these index decisions will do what they do.”

That said, with Tesla having having achieved one of the main requirements to be added—reporting profits for four consecutive quarters—the wait has surprised some. Morningstar’s Whiston says that “I’ve seen people saying that inclusion was certain, and I never thought it was certain. It’s likely inevitable, assuming Tesla does not collapse, but I’m glad the committee chose to wait.”

Indeed, simply meeting the parameters for inclusion doesn’t guarantee the S&P Dow Jones Indices will add the company to the S&P 500.

Meanwhile, Etsy, the mega online marketplace known for craft goods, did make the cut on Friday, despite a yawning gulf between market caps (Tesla’s roughly $320 billion dwarfs that of Etsy at around $13.4 billion, as of Friday’s close), leaving some analysts scratching their heads. Yet while Tesla may be more popular and powerful with traders, the company has only just reported the required four consecutive quarters of profits—while Etsy has reported 13 consecutive quarters of profits.

Ives notes the timing for inclusion is still up in the air, but “another quarter of profitability would help answer any lingering questions that S&P have,” he notes.

With the stock’s already having taken a beating earlier last week before Friday’s news, Whiston notes “the investor reaction at least with day traders will be poor because those people are trading it and hoping to flip the stock fast.”

Indeed, adds Ives, the S&P snub is “a gut punch to the bulls.”

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