CORRECTION: This article originally incorrectly used a 65.3% return on the £1,000 example instead of 653%.
Some UK-based investors think that they can’t invest in US-listed stocks, like Tesla (NASDAQ: TSLA). So even though they see the headlines of indexes such as the NASDAQ printing all-time highs, they think that they’re going to miss out. This isn’t true. Although you need to check with your broker or platform provider on the specifics, there shouldn’t be anything stopping you buying US stocks. Indeed, in most cases you can even hold stocks like Tesla in a Stocks and Shares ISA.
With that out of the way, it’s time to look at one of the standout performers on the other side of the pond. Tesla has rallied to new highs in a short period of time, leading to the news last week that the firm is going for a stock split. This is largely a technical event that doesn’t actually change the value of your investment. The stock split lowers the share price, but you receive more shares, so it all works out in the end.
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Tesla stock performance
Ignoring the upcoming stock split, the share price trades at around $1,677. One year ago, Tesla stock was trading at $219. This means a gain of 765%. So a £1,000 investment would now be worth £7,650! This is an exceptional performance from a true growth stock that’s now the most valuable car company in the world. But what went into this huge price gain in a short space of time?
First of all, it’s important to look at the financial performance. 2019 pre-tax income came in at a loss of $665m, which was much better than the previous year’s $1bn loss. Given that the firm has always been loss-making, the steady move towards becoming profitable is one factor driving investors. I understand that Tesla has been making a negative earnings-per-share (EPS) for several years, but this is already priced in. Any positive surprise (even if it’s still a negative number) has been great for the share price.
Another share price surge was seen after Q1 2020 results were released, showing an actual profit of $16. This was on revenues of $5.9bn, so isn’t much to shout about, but does show a shift in the company. If this continues, then Tesla could hit the financial targets that analysts had been forecasting for years.
In itself, that’s the other major reason for the share price growth over the past year. Investors are buying Tesla stock because of what it could be worth in five years’ time, not what it’s intrinsically worth right now. We see this with other technology-based stocks. The price is driven up by forecasts, instead of actual performance.
Should I buy it now?
In a nutshell, probably yes. But that isn’t from a fundamental point of view. Even with better financial performance and people buying into the future of the firm, the 765% share price rally cannot be fully explained. Tesla stock does appear to be being bought for pure speculation, almost making it into a bubble. At the same time, the company is doing very well, even with the global pandemic. In order not to miss out on potential large future gains, I would buy some Tesla stock now, but only with funds that I can afford to lose.
