I’ve been keeping a close eye on Tesla (NASDAQ: TSLA) stock lately. The electric vehicles (EV) market it operates in has the weight of major governments pushing it forward, and the share price has surged for years and years.
To my mind though, there are still question marks here. While EV adoption is happening, it’s still mostly driven by incentivised fleets and businesses. This type of purchase makes up 75% of EV sales in the UK – thanks to some generous tax breaks – and only 25% are private buyers.
So it’s not clear whether the average driver on the road wants an EV given the cost and lingering issues like range and reliability that haven’t been ironed out yet.
This isn’t a thought exercise for me, either. I own Tesla shares and I’m curious to see how my investment performed this year. I’m equally curious to explore whether it’s still a good buy, or whether it might be time to sell.
£2,500 in Tesla
My example stake will be £2,500 invested at the start of the year. Interestingly, early January was a two-year low for the stock. The share price briefly dipped to just $108 from its $407 all-time high in 2021. So it was a good time to buy.
This £2,500 stake, if bought on the first trading day of January, would have turned into £5,616 up to today. That’s a 124% increase in only 10 months or so. A pretty terrific return by any standards.
I’d be pleased to see my stake double in any year, but in 2023 it seems almost unbelievable. UK stocks have disappointed once more and even after hitting record highs in February, the FTSE 100 is down year to date.
Tesla’s return, though, is unusually good even for US stocks. While the S&P 500 has enjoyed a solid year, that’s driven almost entirely by the so-called ‘Magnificent 7’ – the big tech stocks like Tesla, Apple, Meta and the like. The other 493 stocks on the US index are down 2% for the year.
In short, it’s been a banner year for the EV maker.
67 times earnings
So what comes next? Well, after this strong performance, Tesla does look overpriced. The stock currently trades at a pricey-sounding 78 times earnings, and HSBC agreed last week when it called Tesla “a very expensive auto company”.
A price that high needs plenty of growth to justify it. To be fair, Tesla’s sales figures have been climbing for years. If the trend continues, such a high price-to-earnings ratio might seem like a good deal a few years down the line.
Two issues concern me, though. Firstly, high interest rates make borrowing more expensive. This could impact sales of Tesla’s EVs, which some might call an expensive toy compared to a cheaper second-hand combustion vehicle. Second, the signs are there – like Shell’s recent pullback from renewables – that the Net Zero targets many governments have are going to be delayed or sidelined.
Both these issues are going to make me think carefully about the future of my shares. While 2023 was a great year for Tesla, I’m not as optimistic looking ahead.
