But we compare very different companies all the time, don’t we? And most of us, surely, have often faced choices between growth shares and value shares.
These two are both on my list of potential buys. And what else matters other than which stock is more likely to provide the biggest total gains?
The share prices have followed very different paths. Compared to Tesla, the Tesco share price has flatlined over five years.
But Tesla is also way down since 2021. Big short-term gains and losses often happen with growth stocks like this.
What really counts is what their profit levels are going to be like when they turn into mature and predictable companies.
And for Tesla, we really have no idea yet.
Years of cash
Tesco is very different. It has a long history of providing solid dividends, and that gives us a good set of valuation measures.
There’s a forecast dividend yield of 4.2%. If the annual payment remains the same, and the share price doesn’t change, how would an investment in Tesco fare by 2030?
Well, if those conditions hold, we’d see a 33% gain in the next seven years. That’s from reinvested dividends alone, with no share price change.
If Tesco shares grow in value by 2023, that could mean a nice total return. And total return is what matters.
No dividends here
At Tesla, there are no dividends.
The day will come, I’m sure, when Tesla pays dividends. I just don’t expect it by 2030.
So Tesla’s valuation is all about share price growth. Right now, though, Tesla is on a forecast price-to-earnings (P/E) ratio of about 95. It depends on which experts you ask, but it’s around that.
The big question is how much of the firm’s potential earnings growth is already factored into that valuation. And that’s very hard to guess.
Analysts suggest the Tesla P/E could drop to 44 by 2025, which is as far as forecasts go, while Tesco’s comes in at around 11. Is that a fair growth valuation for Tesla?
You know, I think it just might be. At the end of 2020, the Tesla P/E peaked at over 1,000. And I thought that was crazy at the time.
But we’ve since had a couple of years of earnings growth, and a share price correction as the whole Nasdaq index has declined.
Growth vs income
What we’re looking at, clearly, is the age old question of whether buying income or growth shares is more profitable. To a large extent, it depends on the timing.
So which do I think will be worth more in 2030, an investment today in Tesco or Tesla? Right now, I’d plump for Tesla, though I do see a lot of risk.
It’s not the only electric vehicle game in town, for one thing, and China could well end up with a lot of the market.