Robinhood, Applovin Stocks Plunge 6%, 5% After S&P 500 Snub

Robinhood Markets, a prominent brokerage firm, and Applovin, an AI concept stock, experienced significant declines in their stock prices following the announcement that the S&P 500 index would maintain its current constituents without any changes. This decision by the S&P Dow Jones Indices company came as a surprise to many analysts and investors who had anticipated potential additions to the index.

Robinhood, which had been widely regarded as a top candidate for inclusion in the S&P 500, saw its stock price plummet by over 6% in after-hours trading. The company had gained approximately 13% during the week leading up to the announcement, driven by optimistic forecasts from major investment banks. Similarly, Applovin, which had risen by 6.52% over the week on expectations of potential inclusion, saw its stock price drop by over 5% in after-hours trading.

The decision to keep the S&P 500 constituents unchanged highlights the stringent criteria that companies must meet to be included in the index. According to the selection criteria set by S&P in March, companies must have a market capitalization of at least 205 million dollars, demonstrate profitability, liquidity, and a sufficient proportion of freely tradable shares. While several companies, including AppLovin, Interactive Brokers, and Robinhood, met the market capitalization threshold, they fell short in other areas, particularly profitability under GAAP standards.

For instance, Snowflake and Roblox, both with market capitalizations exceeding 700 million dollars and 610 million dollars respectively, were excluded due to their inability to meet the GAAP profitability requirements. Investors often evaluate these companies based on non-GAAP earnings or free cash flow, which exclude certain expenses recognized under GAAP, such as employee stock-based compensation.

The inclusion in the S&P 500 index is highly coveted by companies due to the significant benefits it brings, including enhanced reputation and passive buying from index funds. Index funds hold over a quarter of the shares in S&P 500 constituents, making the index's composition crucial for investment strategies. The announcement of a company's inclusion typically boosts its stock price, while exclusion can exert downward pressure as index funds adjust their portfolios.

In previous quarterly rebalancing, companies like DoorDash, Williams-Sonoma, TKO Group Holdings, and Expand Energy were added to the S&P 500. DoorDash, with a market capitalization of 900 million dollars, and the other three companies, with market capitalizations ranging from 220 million dollars to 320 million dollars, benefited from this inclusion. Since mid-2022, the S&P Dow Jones Indices has synchronized index adjustments with quarterly rebalancing, reflecting changes in the number of outstanding shares due to stock buybacks and new issuances.

Currently, the five smallest companies by market capitalization in the S&P 500—Caesars Entertainment, Enphase Energy, Mohawk Industries, Invesco, and APA—face the highest risk of being removed from the index. This latest development underscores the importance of meeting the stringent criteria set by the S&P Dow Jones Indices for inclusion in the benchmark index, and the significant impact that such decisions can have on the stock prices of affected companies.