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Posted on EVANNEX on October 11, 2022 by Peter McGuthrie
The past few years have played a crucial role in Tesla’s history, turning the automaker from a struggling auto company with big dreams to a key player on Wall Street with a strong grasp on the electric vehicle industry. And now, one investment rating service has taken notice of Tesla’s shift, officially saying it’s a worthy consideration for investors.
Above: The logo on the front of a Tesla. Photo: Afif Ramdhasuma / Unsplash
Tesla was upgraded to investment-grade BBB status by S&P Global Ratings earlier this month, as reported by electrek. Before the change, Tesla was still considered a “junk bond” by S&P and other investment rating services, although the automaker delivered two years’ straight worth of profits with a cash position of more than $18 billion to date.
The investment ratings represent a long-term credit rating, which takes into account various considerations such as debt levels, profit, cash flow and other common financial market indicators. Before the change, Tesla was rated BB+ by S&P Global Ratings, which is reserved for junk bond-level stocks.
S&P Global Ratings said that the company’s credit profile has improved due to its continuingly dominant position in the EV industry. Noting the company’s cash flow and increased production capacity with Tesla’s newly opened Giga Berlin and Texas locations, the investment rating index says continued leadership in the market makes it officially investment-grade.
“We now view Tesla’s credit profile more favorably because it continues to demonstrate market leadership in electric vehicles (EVs), with solid manufacturing efficiency that supports strong EBITDA margins and sustained positive free operating cash flow (FOCF), above our previously established upside triggers,” wrote the S&P Global Ratings team in a memo.
The firm also said it expects Tesla to keep its debt levels low as profits continue to remain steady or strong — a key indicator of potential future growth.
“The stable outlook reflects our expectation that Tesla will maintain low debt levels as it sustains its solid market share, profitability, and strong liquidity amid a weakening economy and an increasingly competitive environment for EVs.”
For the average investor and those who are already Tesla shareholders, the change doesn’t affect much. However, it may increase interest from large investment funds, many of which have protocols against investing in stocks ranked below investment grade. Now that Tesla has become a “blue chip” company, as many call investment-grade stocks, the automaker’s stock could become more appealing to firms that were prevented from buying shares.
In any case, no one can fully predict what a company’s stock will do. But for many, Tesla’s upgrade to BBB by the S&P Global Ratings could be the push needed to re-open the stock as an option for their portfolio.
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