I often describe Tesla (NASDAQ:TSLA) as a ‘Marmite‘ company. People tend to either love or hate the electric vehicle manufacturer, complete with the charismatic Elon Musk. It’s a similar story with Tesla shares. Some (myself included) think that the company has been overvalued, inflated by investors who love the business. Either way, it has definitely been a roller coaster year for it. So if I’d invested £1k a year ago, here’s how it would have turned out.
Nothing wrong with a profit
A year ago, the Tesla share price closed at $671. On Friday, it closed at $737, having jumped over 4% to finish the week. Using those numbers, my £1,000 would be worth £1,098. A percentage gain of almost 10% in a year isn’t something to be sniffed at! This is especially true considering the performance of the Nasdaq 100 index where the stock is listed. Over the same period, the index is down 18.5%.
However, some existing Tesla investors might not be over the moon with just a 10% gain. After all it was only in early April when the share price jumped above $1,000. At that time, the gain on holding the shares would have been 49%.
Before I get on to the concerns I have about the high volatility associated with the growth stock, let’s quickly run through the reasons for the overall gains.
Strong financials have been key. Tesla is no longer a loss-making firm. For example, the Q1 results showed a very respectable operating profit margin of 19.2% and net income of $3.3bn. Not only is the profitability good, but the results have been showing growth compared to previous quarters.
Further, the company benefited late last year and early this year from the buzz around EV manufacturers. With Lucid Motors and Rivian getting more investor attention, Tesla naturally saw some increased coverage as well.
Future direction
The volatility in the share price does cause me some concerns. A sharp price rise in a short period of time pushes up the valuation of the company to high levels. Even at $671 the price-to-earnings ratio is 100.
When the share price is falling, I feel that it could open the trap door to a significant move lower. For example, inflation concerns and issues with manufacturing at the Shanghai factory have caused the share price to fall since April. Yet given the high valuation, even at the current price, I still feel the stock could drop even lower before it steadies at a fair price.
Had I bought a year ago, I’d be happy, of course. It’s much easier to feel good about the prospects of a stock when I’m in profit. Even if the share price falls a bit further, it can still be sold for a gain. But I’m not convinced about buying now. Even with a time frame of the next year and beyond, I think I’m better off waiting on the sidelines.
