Colin Rusch — managing director and senior analyst at Oppenheimer — joins Yahoo Finance Live to discuss what Tesla’s inclusion in the S&P 500 means for the stock and the index, and whether a trillion dollar market cap is on the horizon for the electric vehicle maker.

Video Transcript

MYLES UDLAND: Well, today is the day Tesla begins trading as a member of the S&P 500. Let's take a look at the stock here in the early going, down about 4% or so. We saw that huge rally in shares of Tesla right at the end of the session on Friday as the indexes got themselves squared up. And now the stock, again, under a bit of pressure in the early going here.

Joining us now to talk a bit more about Tesla and whether this move changes anything for the company going forward is Colin Rusch. He's a senior analyst covering Tesla over at Oppenheimer. Colin, great to talk with you once again.

So certainly a stock that has no kind of lack of opinions among your client base over there, but I'm just curious with the company now in the S&P, does this change anything with respect to, I don't know, maybe just the incoming you're going to get on a name that now anybody who's indexing does have some exposure to?

COLIN RUSCH: No. I mean, this is a name that the investor base has been grappling with for years about what to do with it. A lot of folks have avoided it really until last year. And so I think there's a number of funds that are indexed to the S&P 500 that are now-- you know, have to be more engaged than they had been before.

I think ultimately what this does for the company is help stabilize their capital base. They have had some very dedicated investors, but obviously it's been a very volatile stock. I think with the inclusion in the S&P 500, you're going to start to see a little bit less volatility in the stock, and it will help them, I think, over time in terms of that stable capital base.

BRIAN SOZZI: Colin, what has to happen for Tesla to reach the trillion dollar market cap level? We're not seeing that discussion being started right now, but if their 2021-- it looks like what they've done in 2020 just in terms of the stock-price performance, in terms of profits, in terms of narrative on conference calls, do you think they hit that next year or what would get them there?

COLIN RUSCH: You know, we've got to get a little bit more information from them. But, you know, really, at the end of the day, you know, I think the elevated levels on the stock and the potential for it to go higher is going to be driven by their autonomous-vehicle program. You know, they've got almost a million vehicles on the road right now collecting data. That's a huge advantage in terms of the intelligence of their system and the learning process.

And I think as we see the disruption of the transportation, materials, and power markets continue forward and Tesla being a leader across those markets, really that AI functionality and their leadership around autonomy is going to be the thing that would drive the stock higher.

JULIE HYMAN: Colin, short interest in Tesla shares is at the lowest-- I don't know if it's ever been, but certainly it's been a long time. It's around 5%. It had been as high as 18% this year according to IHS Markit. How much does it being in the S&P 500 kind of provide a floor under the stock or insure against some of the extreme volatility that we have seen in Tesla over the years?

COLIN RUSCH: You know, it's, I think, an important point to highlight that this has been a stock that's been heavily shorted, which has both moved the stock lower as well as led to some short-covering spikes. I think with this sort of, you know, backdrop of the broad base of folks that need to own the stock, you do tend to think about this as a stable platform.

The challenge really is going to be for everyone around valuation and this company, you know, growing into this valuation. With the potential for them to reach 10 million vehicles, to have autonomous cars on the road, that's going to be the thing that everyone's tracking. And if you see them veer off the path of moving towards a, you know, call it 10% market share in light-duty vehicles and being a leader on the autonomy, that's when you can start to see some real challenges from a valuation perspective. But as long as they continue to stay in front of their competition on those key metrics, you know, in terms of fulfilling the vision here, I think you're going to see a pretty stable stock.

MYLES UDLAND: You know, Colin, broadening out a little bit and thinking about your coverage area more generally-- you know, clean energy, kind of sustainable, you know, technology I guess we want to think about it that way, ESG has just been such a huge theme in the backdrop of markets in the last couple of years. It seems like it's accelerated this year, is likely to continue growing in the decade ahead. How much more interest-- how many more questions are you getting on the broader area that you're covering now versus a couple of years ago where there's been a lot of exciting stock names there and just a lot of investor interest broadly I think in a lot of the themes, again, that you're focused on?

COLIN RUSCH: Thanks for asking that question because I think people get confused about climate-related names and sustainability related names versus what ESG is. ESG is really just a series of metrics that look at how a business is run and how efficiently and how much transparency there is in those businesses, and there are environmental considerations in those metrics. But it's a very different conversation.

Now if you're looking at climate-related names and sustainability names, yeah, there's been a really wide range of interest, you know, really dating back six quarters for us. And I've gone through, you know, four or five hype cycles with this group, you know, over the course of years, and this is really, I think, a transformative moment for the capitalization of these technologies. We're seeing real compelling unit economics without governmental structural support. We're also seeing, you know, a broad base of interest, you know, across the globe, whether it's Europe, US, or Asian investors.

And we're seeing, you know, I think, you know, a real view from investors to look out three to five years in terms of where the world is going to be and wanting to be invested along those trends. And climate is a huge macro trend that folks need exposure to, and we now have a substantial market cap that people can participate in.

And so we're expecting that capital base to continue to grow, you know, become more stable. And again, the challenge is really around valuation, you know, for everyone in this market in terms of looking at where these companies are and where they're capitalized and looking at, you know, how interest rates really impact what people pay for growth, what that means for total cost of ownership.

And so we continue to watch the 10-year note as a real indicator of what valuations are going to do in this group, but we continue to maintain a bullish stance at this point given what we're seeing on monetary policy.

MYLES UDLAND: And then Colin, just real quickly before I let you go, do you feel like the investors you talk to now have a slightly-- like they're more comfortable with the kind of valuation numbers that are put on some of these stocks or the way that you might think about a revenue multiple or cash-flow multiple different than, you know, valuing like Exxon or something like that? Do you think people are sort of more comfortable with that idea around valuation than maybe they would have been, you know, a couple decades ago?

COLIN RUSCH: I think everybody, you know, is going through a recalibration of their expectations. And so I think we've seen a lot of skepticism on the market, a lot of skepticism on this group get burned off. And as we go forward, I think folks are getting used to a new environment to operate in.

So, you know, we look at what people are willing to pay and participate in, I think they are really attentive to historical metrics that they would normally pay for things and looking at a new environment and participating but also being very, very cautious around what their downside risk is.

And so my sense is that folks are being judicious and thorough in terms of what they put money to work in and how they put money to work in those names and being attentive to what the market is doing around valuation and in general.

MYLES UDLAND: All right. Colin Rusch, a senior analyst over at Oppenheimer. Colin, thanks so much for joining the show today. Have a great holiday, and happy New Year.

COLIN RUSCH: Thanks so much. You too.