With Tesla slated to join the index next month, it’s time to turn your attention to its other future members.
Nov. 19, 2020
This article originally appears on The Motley Fool, written by Dan Caplinger
Becoming a member of the S&P 500 (SNPINDEX:^GSPC) index is a huge milestone for any growing company. Having S&P Dow Jones Indices, which manages the S&P 500, add your company to the index proves that you’ve truly arrived — and it opens the door to the trillions of dollars that institutional and individual investors put into S&P 500-tracking index funds and ETFs.
Tesla (NASDAQ:TSLA) just found out that it will become the newest member of the S&P 500 in late December. The move ends months of speculation about when the electric vehicle pioneer would get added. The stock is soaring as a result.
Yet with the Tesla announcement behind us, investors want to know which companies might be next. Below, you’ll find three strong candidates worthy of consideration in the near future.
Zoom Video Communications
If Tesla and its nearly $400 billion market cap hadn’t been at the top of investors’ minds, people would’ve wondered when Zoom Video Communications (NASDAQ:ZM) would finally join the S&P 500. The video conferencing platform provider has become a household name across the globe. It has a market capitalization of more than $110 billion, putting it well above many current S&P 500 stocks.
Zoom just went public in early 2019, but it has already met many of the requirements that the S&P puts on joining in the S&P 500. The one that trips up many new would-be entrants is the need to have four consecutive quarters of profitability. However, Zoom has generated positive net income in each of the past six quarters. It has also increased its float over time, making its shares liquid enough to meet the needs of the institutional investors that will trade heavily in S&P component stocks.
Zoom’s prospects for S&P inclusion in the near future look good. Even if the stock pulls back once the coronavirus crisis comes to an end, Zoom has a wide margin before its value would fall enough to warrant not becoming an S&P stock.
Electronic payment specialist Square (NYSE:SQ) isn’t as big as Zoom. Nevertheless, the financial company has made a big splash, challenging established payment processing companies and aiming to offer services to businesses of all sizes.
With a market capitalization of more than $80 billion, Square is certainly large enough to deserve entry to the S&P 500. It has ample share float and has generally been profitable throughout 2019 and 2020.
However, like many companies, Square ran into some challenges during the early part of the COVID-19 pandemic. After two quarters of rising profit to end 2019, Square had a big loss in the first quarter of 2020. It also had a much smaller loss in the second quarter.
Square returned to making money in the third quarter, with success in the company’s cryptocurrency offerings complementing its regular payment processing business. Square’s on target to become an S&P 500 member, but it’ll likely have to wait until 2021 once the business gets back to consistent earnings performance.
At the small end of the spectrum, Enphase Energy (NASDAQ:ENPH) has a market cap of just $15 billion. However, the solar microinverter specialist and member of the S&P Midcap 400 Index has done extremely well, with its stock jumping more than 500% in the past year.
Like Square, Enphase has been consistently profitable recently, having generated a string of six straight profitable quarters until losing money in the second quarter of 2020. It bounced back with a solid performance in the third quarter and appears to be back on track with its long-term growth strategy.
Again, much depends on how S&P Dow Jones will deal with coronavirus-linked setbacks. But Enphase would add exposure to a part of the solar power industry that the S&P 500 doesn’t have currently. It might have to wait until mid-2021 for Enphase to generate another four-quarter streak of profits, but the microinverter company should join the S&P 500 eventually.
Be ready for the next step
Expect to hear a lot about Tesla and the S&P 500 in the next month, but don’t take your eyes off these three stocks. They’re highly likely to follow in Tesla’s footsteps before too long.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Netflix. Read our full disclosure policy here.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square, Tesla, and Zoom Video Communications. The Motley Fool has a disclosure policy.