Imagine that five years ago I had decided that the outlook for the electric vehicle market looked promising, but was not sure what companies might do well. I could have chosen to back both NIO (NYSE: NIO) and Tesla (NASDAQ: TSLA). If I had put £1,000 into both NIO and Tesla shares at that point, what would I have to show for it now?
Massively in the money
The short answer is: I would have a big smile on my face!
NIO shares have fallen almost 90% since 2021. But, despite that, they are still 20% higher than they were five years ago. So my £1,000 investment would now be worth around £1,200.
Tesla shares have also fallen sharply from their 2021 highs. Indeed, they are down by around half since November 2021.
Over five years, however, Tesla shares are firmly in the black. The price has increased by 845%. So my £1,000 stake would be worth around £9,450.
Neither company has paid dividends during that period. Nonetheless, thanks to the share price movements alone, that £2,000 invested five years ago would now be worth around £10,650.
In other words, making that move on both NIO and Tesla shares five years ago would mean I had more than quintupled the value of my investment.
Looking forward rather than backwards
Given that strong performance, what should I do now?
After all, I did not invest in either company five years ago. But ought I to add some NIO shares to my portfolio today? Or perhaps Tesla shares?
The answer to that question cannot be determined by a look in the rear-view mirror. Past performance is not a guide to what will happen next, as the wild movement of both NIO and Tesla shares over the course of the five years demonstrates.
I remain upbeat about the prospects for the electric vehicle sector. NIO and Tesla both benefit from growing user bases and proprietary technical features.
But NIO remains loss-making so I am not yet convinced its business model can be consistently profitable. As for Tesla, I think increasing competition could hurt profit margins. Its valuation of 68 times earnings is too rich for my tastes. For now, I plan to buy neither.
Actionable lessons from past performance
Still, as an investor I like to learn lessons that can help me make more lucrative choices in future.
For example, the numbers above reflect the change in NIO and Tesla shares, which are both denominated in dollars. But as a UK investor I also need to consider the impact of exchange rate changes when buying foreign shares. In this case, a weakening pound in recent years would have worked in my favour. But the reverse can also be true.
I remain upbeat about the outlook for electric vehicles, but I also think I could learn lessons for other investing themes.
For example, I think there is a big opportunity in renewable energy.
But, as the far stronger performance of Tesla shares in the past five years compared to NIO shows, picking an industry with strong growth prospects is just one step for a smart investor. I also need to consider what companies could be the biggest winners within that sector.
