Nasdaq 100 Slots Seen Opening for Lucid, Airbnb in 2021 Shake-Up

(Bloomberg) -- The annual shakeup to the Nasdaq 100 stock-market index may open up slots for Lucid Group Inc. and Airbnb Inc.

JPMorgan Chase & Co.’s Min Moon, the bank’s head of equity index research and program trading strategy, said in a report that the two could be added to the closely watched tech-heavy benchmark late Friday, when the Nasdaq exchange will announce annual membership updates to account for changes in market capitalization. Such moves take effect after the close of trading on Dec. 17.

Palo Alto Networks Inc., which shifted its listing over from the New York Stock Exchange in October in the hopes of being included in the Nasdaq 100, Fortinet Inc., Zscaler Inc. and Datadog Inc. are also potential candidates for the index, according to Moon.

The Nasdaq 100 is made up of the largest non-financial companies listed on the exchange. While there’s no minimum requirement for market value, its stocks must have an average daily trading volume over 200,000 shares to be eligible. They also must be listed on a major exchange for three full months following their initial listing. Lucid qualifies under that criteria. Its larger competitor Rivian Automotive, which went public on Nov. 10, does not.

Lucid’s shares have dropped over 30% since their recent high on Nov. 16 amid a Securities and Exchange Commission investigation and a broader decline in momentum stocks. But Nasdaq bases its decisions for inclusion on where the stock closed on Oct. 31 and the shares outstanding as of Nov. 30, so that won’t affect the outcome.

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Inclusion in such major indexes broadens a company’s investor base because passive index funds and actively managed ones that are measured against it buy the shares. That increases the liquidity, which can translate into a premium on the stock price. 

“That’s good for the companies because if they have to raise capital to build a new factory or invest in a new drug” that issuance “is going to happen at a higher valuation” and in turn a lower cost of capital, “which just makes it easier to fund projects,” said Nasdaq Chief Economist Phil Mackintosh. Mackintosh did not comment on which stocks may be added or removed.

The addition of Airbnb to an index “could open up the company to additional institutional investors that benchmark against any added index,” Morningstar analyst Dan Wasiolek said in an email. Wasiolek said the vacation booking site has “terrific revenue and profitability growth opportunity over the next several years,” but is currently overvalued, trading well above his fair value estimate of $102 a share.

JPMorgan expects that CDW Corp., Fox Corp., Cerner Corp., Check Point Software Technologies Ltd., Trip.com Group Ltd. and Incyte Corp. will be removed from the index to make way for the new entrants.

Despite the benefits of being in the Nasdaq 100, stocks do not always gain on the news. Only 64% of new additions finished up on the first day following the announcement, according to the study by Nasdaq. 

That muted performance can be partly attributed to traders who buy in ahead of the announcement using forecasts such as JPMorgan’s report, Mackintosh said.

“Traders are already positioning for the news, so when the news comes out it might not be the big positive shock that you think because the market’s like, ‘yeah we knew that stuff,’” he said. 

While the immediate reaction might be a bit lackluster, stocks do outperform the market by an average of 1% from five days pre-announcement to post-index inclusion, according to the Nasdaq study of Nasdaq 100 additions from 2010 to 2020.

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