On October 25, 2021, Tesla became the first automaker to join the elite club of trillion-dollar companies, also called “Big Tech”: Apple, Amazon, Alphabet, and Microsoft. This, once again, raises the question: is Tesla an automotive company (within the Consumer Discretionary sector) as categorized by Global Industry Classification Standard (GICS®) or a technology company like its peers in the trillion-dollar club?
The categorization of companies has important implications. A company’s valuation and risk characteristics are driven by a combination of factors specific to the company (idiosyncratic risk), as well as by many macro factors that impact companies in its peer grouping (systematic risk). The categorization of companies can help investors understand a company’s growth opportunities, analyze valuations, and identify risks relative to the broader market and its peers. This is the basis for investment solutions.
At MV Index Solutions (MVIS), we understand that company classifications are complex, fluid, and dynamic. Classifications, like GICS can work well for one set of companies but may not be relevant for another, depending on the specific investment use case. For example, investors requiring a diversified approach to capturing Tesla’s industry growth, can seek to index a basket of automotive companies as classified by GICS. Using this approach, investors face a high concentration to Tesla, which stands at approximately 50% of market cap weight and is larger than the next 9 companies combined in a global automotive index weighted by market capitalization (as of September 30, 2021). Investors should question if this is a diversified approach and whether this truly reflects the growth opportunity for companies impacted by similar macro dynamics to Tesla.
Tesla operates in many industries with revenue streams tied to several themes: from e-vehicles manufacturing to development in energy storage and solar energy generation systems. For MVIS, Tesla can be found as a constituent of BlueStar Autonomous Driving Index (ticker: BAUTNTR), BlueStar Global GreenTech Index (ticker: BGTQNTR), BlueStar Electric Vehicle Industry Index (ticker: BEVNTR), and MVIS Global Low Carbon Energy Index (ticker: MVSMOG).
TESLA INC (ISIN: US88160R1014), MVIS Index Membership
Source: MV Index Solutions. Data as at 26 October 2021.
About the Author:
Joy Yang is Global Head of Index Product Management at MV Index Solutions (MVIS). She is responsible for managing MVIS products and services to accelerate innovation in financial index design and adoption. Joy brings more than 25 years of investment experience to MVIS, having led teams delivering index and quantitative-active investment solutions at Arabesque Asset Management, Dimensional Fund Advisors, Vanguard, Aberdeen Standard Investments, AXA Rosenberg and Blackrock. Joy has an MBA from the University of Chicago Booth School of Business, and a BS in Electrical Engineering from Cooper Union’s Albert Nerken School of Engineering.
The article above is an opinion of the author and does not necessarily reflect the opinion of MV Index Solutions or its affiliates.