The Tesla share price has gone down recently. While they were trading around $880 in late January, they closed around $563 on 8 March. With more competition entering the marketplace, investors seem to be a little less optimistic over the company’s future growth. While Tesla is lower now than it was before, I’d buy the FTSE 100 instead. Here’s why.
FTSE 100
In the medium term, I’d buy the FTSE 100 rather than Tesla for two reasons.
First, I think the FTSE 100 has less risk than Tesla. Many FTSE 100 companies are established with wide moats. The FTSE 100 index as a whole is diversified across many different sectors. Tesla, meanwhile, isn’t as established and the company depends heavily on the fortunes of the electric vehicle sector. If too much competition enters into the electric vehicle sector or if Tesla doesn’t sell as many vehicles as expected, its stock might not do as well.
Second, I reckon the FTSE 100 has a more reasonable valuation than Tesla does. Because it hasn’t rallied much at all over the past few years, I think the FTSE 100 could be in ‘value territory’. Analysts at UBS seem to share the same thinking as they wrote, “We maintain our preference for the UK equity market, which trades at a 20 per cent discount to global equities on a 12-month trailing price-to-earnings ratio, yet offers close to 40 per cent earnings growth in 2021 on our forecasts.”
Although the relative P/E comparisons between indexes may have changed slightly since the UBS analyst comments, I think the core rationale still holds. Tesla, meanwhile, has a much higher valuation with a P/E ratio that’s around 900 and a forward P/E ratio of around 100.
Given that I think the FTSE 100 is trading at an attractive valuation and I expect its overall component earnings to increase meaningfully in the next few years as the global economy recovers, I reckon the odds are pretty good that the FTSE 100 will be higher in a few years time than it is now. The UBS analysts themselves have a target of 7,200 for the FTSE 100 at the end of this year, although I am not sure if it will end up being that. Forecasts can change as developments occur in the future, and can’t be relied on.
Given Tesla’s high valuation, I’m not as sure about its medium term.
Risks and the long term
With that said, the FTSE 100 does have risks. In my view, the vaccines are currently winning in the battle between Covid-19 vaccines and variants, but that could change. If the variants become too much of a problem, economic growth might not be as strong as analysts expect. In that case, FTSE 100 profits might not increase as much as expected either (if they grow at all).
I reckon Tesla could also potentially be a good long-term investment depending on how well the company does with autonomous driving and other technologies. To me, Tesla’s Elon Musk is a genius and his companies will create a lot of value. Musk, however, has multiple companies and Tesla will have substantial competition in the future.
