1 US growth stock I’d buy over Tesla

Tesla is one of the most popular stocks in the world today. But Edward Sheldon says he’d rather buy this growth stock instead.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tesla (NASDAQ: TSLA) is one of the most popular stocks in the world right now. Here in the UK, Tesla is currently the most owned stock on the Trading 212 platform. Meanwhile, on Hargreaves Lansdown, it’s consistently been one of the most bought stocks in recent months.

Tesla stock: investors love it

I can see why the Tesla stock is popular. For starters, the brand is the undisputed leader in the electric vehicle (EV) industry at present. This industry is set for massive growth in the years ahead as it’s still in its infancy. This growth should provide tailwinds for Tesla.

Secondly, its car sales are expanding rapidly. Last year, the group delivered 499,950 vehicles. That represents a 36% increase on the number of cars delivered in 2019. The company is currently building new factories in Austin, Texas, and Brandenburg, Germany, in an effort to boost production and sales volume.

Third, the company has an influential leader in Elon Musk. He has an incredible track record when it comes to growth ventures.

Having said all that, I just can’t bring myself to buy Tesla stock at the current valuation. With a market capitalisation of $766bn, the company is valued at around $1.5m per car sold. Meanwhile, the stock sports a forward-looking price-to-sales (P/S) ratio of 16 and a forward-looking price-to-earnings (P/E ratio) of around 190. These valuations are just too high for me.

Given that competition in the EV space is heating up, I see Tesla stock as too risky for my portfolio right now.

I’d buy this US growth stock

So I’m looking elsewhere and one US growth stock I’d be happy to buy for my portfolio today is Alphabet (NASDAQ: GOOG). It’s the parent company of Google and YouTube.

I’m bullish on Alphabet for a number of reasons. Firstly, it’s one of the most dominant players in the digital advertising space. The online advertising market is expected to be worth $980bn by 2025, up from $304bn in 2019. This long-term growth should benefit the company.

Secondly, I’m excited about the long-term growth prospects for YouTube. In recent years, this platform has evolved into an entertainment powerhouse. In Q4 2020, YouTube ad revenue rocketed 46% to $6.9bn.

Third, Alphabet is a major player in the cloud computing industry. Last year, cloud revenues rose 46% to $13bn.

Finally, Alphabet is a big player in the autonomous vehicle space through its Waymo subsidiary. It’s early days here, but the prospects look very exciting.

Now, Alphabet sports a huge market-cap itself. Currently, the company is worth around $1.4trn. Yet here’s the thing. Sales and earnings per share are expected to come in at $225bn and $69 respectively this year.

This means the stock’s forward-looking P/S ratio is about 6.5 while the forward-looking P/E ratio is about 31. These ratios are still high – meaning there’s valuation risk. But, in my view, they’re much more reasonable than those of Tesla stock.

Aside from the valuation risk, there’s also risk associated with regulation. Major regulators are targeting big tech at present and this adds uncertainty to the investment case. It’s also worth noting the cloud industry is highly competitive. Alphabet faces competition from the likes of Amazon and Microsoft.

Overall, however, I think the long-term risk/reward proposition is attractive. I see this growth stock as a safer bet for my portfolio than Tesla stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Alphabet, Microsoft, Amazon, and Hargreaves Lansdown. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Microsoft, and Tesla. The Motley Fool UK has recommended Hargreaves Lansdown and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »