Tesco (LSE:TSCO) shares have flown in 2025, delivering a total return above 20% factoring in price gains and dividends. That’s just above what the broader FTSE 100 has delivered since 1 January.
Based simply on price action, someone who invested £5,000 at the start of the year would now have £5,915. That’s a pretty tasty result, but brokers think the Tesco share price could just be getting started.
Could investors make even more money over the next 12 months?
Making progress
Like many FTSE stocks, Tesco is followed by a large community of institutional analysts. This includes Citi, which today has the City’s most bullish price forecasts for the share.
On 12 December, it hiked its former price forecast of 450p per share to 510p. That represents an increase of 16% from current levels.
Of the 13 with ratings on the retailer, the majority are overwhelmingly positive — 10 either rate it a Strong Buy or Buy. But what makes the grocer so attractive according to forecasters?
Analysts at RBC Capital consider Tesco “a best-in-class player in the UK food retail space, with a strong business model and an experienced management team“.
This has helped the grocer gain market share in what’s become an increasingly tough sector. Tesco’s share rose 7.7 basis points in the first half, to 28.4%, having grown for 28 straight four-week periods.
Deutsche Bank, meanwhile, have praised the retailer’s “operational efficiency, scale and purchasing power“, adding that its extensive online operation and Clubcard loyalty scheme offer “competitive advantages with long-term monetisation opportunity“.
But look at the price
But do these qualities make Tesco shares a Buy today? I’m not so sure.
This year’s price rise means these factors are now baked into the company’s valuation. In fact, its forward price-to-earnings (P/E) ratio of 15.5 times — well above the 10-year average of 12.1 times — suggests investors are already paying a premium for the firm’s recent resilience.
Such a valuation could limit further upward movement for Tesco’s share price. But more than this, it might prompt a sharp pullback as pressures mount in the UK grocery sector.
Just this week (15 December), Jefferies analysts cut Tesco’s rating to Hold from Buy due to that sky-high valuation.
So what could go wrong?
Alarmingly, cracks are already stating to show in Tesco’s investment case.
Most recent trading numbers show that its share gains are starting to slow, reflecting intensifying competition among Britain’s supermarkets. A continuation could have significant implications for the share price.
The company can of course keep slashing prices to maintain its momentum. But this will come at a huge further cost to margins and profitability, which already dropped 10 basis points to a thin 4.6% during H1.
It’s difficult to see how things improve on this front, with budget retailers Aldi and Lidl rapidly expanding and mid-tier operators accelerating price cuts. To make things worse, costs are also rising across the business.
As a consequence, Tesco’s pre-tax profits slumped 6.3% to £1.3bn in H1.
For these reasons, I won’t be buying Tesco’s shares for my portfolio. But they may be worth considering for more risk-tolerant investors today.
