Tesla is defying its critics to enter the realm of the most highly valued companies in the United States. On December 21, Tesla (NYSE: TSLA) will join the S&P 500, valued at more than $551 billion to the index. The auto manufacturer’s Model 3 is the world’s best-selling electric car in history, delivering 139,000 vehicles in the third quarter alone.
Tesla’s inclusion in the S&P 500 is significant for the auto industry – but it’s also a major leap forward for clean energy. As I noted last year, Tesla has made significant investments in the control of battery power using the Internet of Things. While Tesla will always be known for the electric car, in the long run, its clean energy and Internet of Things (IoT) technology may be more transformative for how we live our lives.
In particular, Tesla is reducing the cost of batteries – typically one of the most expensive components in an EV – by shifting to in-house manufacturing and improving the design of the battery cells. Through these innovations, the company believes it could reduce the cost of batteries by 56% ($/kWh). With many other auto manufacturers rushing to produce EVs, batteries could be at the point that solar panels were 5 years ago when it comes to cost – and about to hit the “Nike
Tesla is not the first clean energy stock to be included in the S&P 500 index. When we look selectively at utility and energy companies included the S&P 500, some stocks with a clean energy focus have posted higher gains than the overall index year-to-date, such as NextEra Energy (NYSE: NEE), a utility company that owns the world’s largest portfolio of wind and solar farms, saw its stock rise by over 25% year-to-date on an annualized basis.
However, that is not true across the board. Duke Energy (NYSE: DUK), a utility company that owns and operates more than 2,975 megawatts of solar and wind power, posted annualized gains of less than 5% year-to-date. American Electric Power (NYSE: AEP), a public utility that invests in renewable power, posted an annualized loss of more than 10% to its stock price. Investors will need to be sure that the company they are investing can hold true to claims on renewable investing and be financially sound to weather through the peaks and troughs.
The Clean Energy Boom
2020 has seen a boom in clean energy, and it is set to continue. While larger institutional investors have been investing in large-scale renewable energy projects for decades, the appeal of clean energy as an investment is starting to spread to individual retail investors.
According to Morningstar, small investors accounted for $80.5 billion of flows into sustainable funds during the third quarter, up 14% from the 2nd quarter. News stories that solar power is now cheaper than electricity generated by gas-fired power plants have cemented investors’ beliefs that renewable energy will replace fossil fuels over the coming decade.
Based on Ned Davis Research’s Thematic ETFs, clean energy took in around $1.5 billion in monthly ETF asset flows as of November 30, 2020.
“The clean energy momentum could continue for decades given the backing from both governments and private industry,” explains Pat Tschosik, Senior Portfolio Strategist at Ned Davis Research. He adds that while wind and solar have been the main drivers of the clean energy theme, electric vehicles and battery/energy storage are also contributing to the “Green Wave”.
In addition to government backing, particularly under the Biden Administration as discussed in my last blog, the growing wave of investment in ESG funds by institutional investors and HNWIs will continue to drive that boom. In addition, the Biden administration may extend tax credits for solar, wind and other renewable energy technologies.
Tesla Is A Bellwether
Tesla’s inclusion in the S&P 500 is a historic moment for the clean energy industry. Despite its critics, the electric vehicle and clean energy company proved has achieved a high valuation among stock market investors. The company just announced that it plans to raise as much as $5 billion through a sale of its stock – capital which will go towards plans to boost its manufacturing capacity even further and will cement its dominance as the world’s first electric vehicle company.
Tesla is at the cusp of a broader trend towards emerging technologies and clean energy. Other companies in this sector will follow suit. One way to gain access to growth in renewable energy is through the iShares S&P Global Clean Energy Index Fund (ICLN)