SanDisk Rises to the S&P 500, Leaving Strategy Behind

On November 28, 2024, SanDisk Corp. will officially join the S&P 500, taking the place of Interpublic Group of Companies Inc., as announced by S&P Dow Jones Indices. Following the announcement on Monday, shares of SanDisk surged over 9% in after-hours trading.

Key Takeaways:

SanDisk will join the S&P 500 on November 28, 2024, as it outperformed market expectations.
Strategy, despite holding 640,808 BTC, remains excluded from the S&P 500 due to earnings volatility linked to Bitcoin prices.
Traditional finance’s skepticism surrounding digital asset companies like Strategy continues, creating challenges for their index inclusion.
The contrasting journeys of SanDisk and Strategy highlight the divide between conventional and digital asset business models, raising questions about future index eligibility.

This development highlights SanDisk's rapid advancement, while Strategy (formerly known as MicroStrategy) once again faces exclusion from the S&P 500 despite holding more than 640,000 Bitcoin.

SanDisk’s Impressive Growth Towards Inclusion

SanDisk's shift from the S&P SmallCap 600 to the S&P 500 showcases its strong market performance in recent months. With a market capitalization nearing $33 billion, driven by increasing demand for artificial intelligence applications, the company has surpassed the typical thresholds for small-cap indices, making its transition to the S&P 500 reasonable.

The announcement coincided with the Thanksgiving holiday trading session, underlining the urgency of the rebalancing. This replacement is occurring outside the usual quarterly restructure, indicating robust market momentum. On the day of the announcement, SanDisk’s stock rose by 13.33% before continuing to climb in after-hours trading.

When a company joins the S&P 500, it typically attracts substantial passive inflows, as index-tracking funds purchase shares to maintain their allocations. This change enhances SanDisk's appeal to institutional investors and increases its overall liquidity. It also amplifies the company’s visibility among investors interested in large-cap equities.

SanDisk’s growth is largely driven by optimism surrounding AI infrastructure. As businesses increasingly adopt advanced machine learning models, the need for efficient storage solutions has become essential. This has intensified investor enthusiasm and contributed to SanDisk’s rising valuation over the past year.

Strategy’s Ongoing Battle for S&P 500 Inclusion

While SanDisk celebrates its success, Strategy remains on the margin, even after meeting several technical requirements. Led by executive chairman Michael Saylor, Strategy holds 640,808 BTC, valued approximately at $72.3 billion, making it the biggest corporate Bitcoin holder globally. However, this heavy concentration in Bitcoin is viewed as a liability by index decision-makers.

Strategy was overlooked in the S&P 500’s recent reshuffle in September, which saw the inclusion of companies like Robinhood, AppLovin, and Emcor. Analysts estimate a 70% chance for Strategy's inclusion in December following positive Q3 results, where the firm reported earnings of $3.8 billion that were strongly influenced by Bitcoin prices.

Still, the volatility of earnings remains a significant challenge. Strategy's earnings fluctuate in sync with Bitcoin prices, introducing inconsistency that clashes with S&P 500 requirements. For example, Q2 2024 generated $10 billion in revenue accompanied by $14 billion in unrealized gains, while Q1 recorded a $4.2 billion loss. The index demands four consecutive quarters of positive earnings, a condition that Strategy has struggled to meet given its Bitcoin-centric strategy.

S&P Dow Jones Indices assigned Strategy a ‘B-’ credit rating, citing its significant exposure to Bitcoin, limited USD liquidity, and a narrow business model. This rating reflects the traditional finance skepticism toward digital asset treasury companies, indicating that the committee views Bitcoin-induced volatility as incompatible with the stability expected from S&P 500 members.

Even if Strategy satisfies market capitalization and liquidity criteria, the committee also evaluates business model diversity, financial stability, and sector representation. While some advocate for evolving index methodologies to incorporate innovative treasury models, traditionalists prioritize consistent, proven earnings—particularly for established benchmarks like the S&P 500.

Bridging Traditional Finance and Digital Assets

The contrasting trajectories of SanDisk and Strategy illustrate a broader gap between traditional finance and digital asset business models. While some cryptocurrency-exposed companies like Robinhood have made it into the S&P 500, Strategy's concentrated Bitcoin holdings present unique challenges. The company’s stock has declined by 35% since its July peak of $434, reflecting disappointment over its exclusion and credit rating issues.

Adding to the challenges, Nasdaq’s scrutiny of digital asset treasury firms creates further hurdles for Strategy. Analysts point out that traditional finance skepticism extends beyond earnings volatility, encompassing concerns regarding long-term business models and regulatory compliance. This wariness persists, despite instances where Strategy has outperformed both Bitcoin and the S&P 500.

Moreover, MSCI’s recent suggestion that Strategy could be removed from its key equity indices has heightened investor concerns about whether similar pressures might eventually affect its S&P 500 eligibility. Historically, Strategy's inclusion in MSCI USA and MSCI World has directed billions into the stock, but analysts now speculate that its increasingly Bitcoin-centric focus may no longer align with conventional index methodologies.

This situation raises critical questions about whether the valuation premium linked to anticipated index stability is at risk and whether the chances of Strategy joining the S&P 500 could become more complicated due to intensified scrutiny.