$10,000 in Tesla When It Joined the S&P 500 Would Be About $15,700 Today. An Index Fund Would Have Done Better.

On Friday, Dec. 18, 2020, shares of electric-car maker Tesla (NASDAQ:TSLA) rose almost 6% to close at a record $695. More than 200 million shares changed hands that session (more than $131 billion of stock), making it one of the busiest trading days in the company's history.

The buying wasn't optional for everyone. S&P Dow Jones Indices had scheduled Tesla to join the S&P 500 (SNPINDEX:^GSPC) at its full weight before the market opened the following Monday. And the addition was based on that Friday's closing prices. In other words, every fund tracking the index effectively paid $695.

Nearly six years later, that $10,000 would have become about $15,700. The same money in an S&P 500 index fund would have grown to about $20,500 before dividends.

Image source: The Motley Fool.

Nearly six years later

Tesla has split its stock once since then (three for one, in August 2022), which turns that $695 closing price into $231.67 per today's share. A $10,000 purchase works out to about 43 of today's shares.

As of this writing, the stock trades at about $364, up 57% from the split-adjusted purchase price. But stretched across almost six years, 57% comes to about 8% a year.

The ride was better at times. The stock traded as high as $498.83 within the past year, a level that would have put the stake above $21,000. It hasn't held it.

The S&P 500, meanwhile, ended that Friday just above 3,700 and now sits close to 7,600 -- up about 105%, or about 13% a year. And dividends would widen the index's lead from there.

Tesla, for all the attention it gets, has trailed the very index it joined.

The reason isn't that the company failed to grow.

Did Tesla deliver?

The purchase valued Tesla at more than $658 billion, the largest addition in the S&P 500's history at the time.

In 2020, the company generated about $31.5 billion of revenue and $721 million of net income, its first profitable year. It produced and delivered about half a million vehicles. Against a price tag of more than $658 billion, the market was paying more than 900 times the year's earnings.

Much of the growth that price demanded did show up. Tesla's trailing-12-month revenue now tops $100 billion, more than triple 2020's total. Notably, the company delivered more than 480,000 vehicles in this year's second quarter alone, up 25% from a year earlier -- nearly as many as it delivered in all of 2020. Its energy storage business, tiny back then, deployed 13.5 gigawatt-hours in the quarter, a 41% jump from a year earlier. And net income over the past four quarters was about $3.8 billion, more than five times what the company earned in 2020, though well below the $12.6 billion it earned in 2022.

However, the stock still lost to the index, because years of that growth were already priced in at $695. Over that stretch, Tesla's price-to-earnings ratio compressed from more than 900 times earnings to more than 330 times earnings. I'd argue most of the company's growth went toward justifying the price index funds had already paid.

Today's price assumes another act

At more than 330 times earnings, today's buyer is arguably making the same purchase the index funds made in 2020 -- paying up front for growth that hasn't arrived yet.

This time, the growth is supposed to come from autonomy. Tesla, which says it is in "its largest and most exciting period of investment," now runs its Robotaxi ride-hailing service in seven major U.S. metros. And its steering-wheel-free Cybercab began carrying passengers in Austin this month, the same day federal regulators began an audit of the vehicle's certification.

That investment isn't free. The company's second-quarter revenue was up 26% year over year, but net income fell 5%, and the company's operating margin shrank to 1.4% from 4.1% a year earlier. Capital expenditures came in at $5.8 billion, more than double the year-ago figure, turning free cash flow negative.

Autonomy may yet deliver, of course, and if it does, today's earnings could look small in hindsight. But I think the 2020 purchase is a useful reminder that even impressive growth can lose to an index fund when the starting price already reflects it. I wouldn't buy shares at today's price expecting them to beat the market.

Daniel Sparks has clients with positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.