Tesla extends rally as traders bet on potential S&P 500 entry

Tesla Inc's shares extended their rally on Wednesday ahead of a quarterly report from the electric car maker that might clear the way for it to join the S&P 500 and attract over $40 billion in new demand for the stock.

Investors watching the company's quarterly report after the bell will be laser-focused on one question: Was Tesla profitable?

A net profit, under Generally Accepted Accounting Principles, would mark four consecutive profitable quarters, a first for Tesla and a key hurdle for it to be added to the benchmark S&P 500 index.

While analysts on average expect a loss, estimates improved after Tesla reported higher-than-expected second-quarter vehicle deliveries earlier this month, helping push the stock up about more than 47% so far in July. Tesla shares were last up 1.5% at $1,591.48.

BofA Global Research raised its Tesla price target to $800 from $500, maintaining its "underperform" rating.

"The technical buying ahead of (Tesla's) potential addition to the S&P 500 has added fuel to the run," BofA analyst John Murphy wrote in client note. "However, in our view, the $1,500+ stock price is not supported by fundamentals, with valuation driven largely by momentum and low rates."

Analysts on average expect a $240 million loss for the quarter, compared with an estimated loss of almost $340 million a month ago, according to Refinitiv.

With a market capitalization of about $295 billion, Tesla would be among the most valuable companies ever added to the S&P 500, larger than 95% of the index's existing components. It would have a major impact on investment funds that track the index.

An S&P Dow Jones Indices spokeswoman declined to comment about specific changes to the index. Eligible candidates are considered by an index committee that weighs factors including sector balance and size representation. The index committee does not make changes based on a specific timetable.

Investment funds that replicate the S&P 500 have at least $4.4 trillion of assets, according to S&P Dow Jones Indices, and those funds would need to buy Tesla shares quickly to avoid errors tracking the index's performance.

Ivan Cajic, head of index and ETF research at Virtu Financial, estimated index managers would need to own roughly 25 million Tesla shares, currently worth about $40 billion.

Additionally, actively managed investment funds that benchmark their performance to the S&P 500 would be forced to decide whether to buy Tesla shares. Such funds manage trillions of dollars in additional assets.

Tesla is among the most loved - and hated - stocks on Wall Street. It has surged about 500% in the past year and is the US stock market's most shorted stock, currently at $20 billion, according to S3 Partners.