Tesla (NASDAQ: TSLA) shares have been one of the best stocks to own recently. The stock has outperformed the broader market in the past few years. In the past year, the stock has returned 450% to its investors. The Nasdaq index rose 45% in the same period.
I would like to understand the various pros and cons of investing in the stock.
Bullish reasons to buy
Tesla has the first-mover advantage of electric vehicles. Most manufacturers will reduce internal combustion engine car production. Governments around the globe are encouraging low-polluting vehicles. Consumers are increasingly becoming conscious about protecting the environment. I believe that electric vehicle stocks will be in huge demand in the next decade. The company also has the advantage to manufacture electric vehicles and build factories from the scratch.
Recently, Tesla has reported its sixth quarterly profit in a row. This is a remarkable feat for the company. Management was able to overcome the critics that the company will not be profitable. By being profitable, the company can keep its place in the S&P 500 index. In fact, Exchange Traded Fund (ETF) ownership has indeed increased after the company’s inclusion in the S&P index. Notably, Cathie Wood’s ARK Funds has been adding more of Tesla shares recently.
Tesla’s energy and storage business has started to do well. In my opinion, this business will help the company to overcome any competition in the electric vehicles segment. For the first time, total battery deployments surpassed 3 GWh in a single year, which is a growth of 83% year-over-year. The company might also benefit from the US and European government’s renewable energy push.
Finally, looking into the financials, the company was able to grow its fourth-quarter 2020 revenues by 46% year-over-year to $10.7bn. Net income jumped to $270m when compared to $105m in the same period last year. Free cash flows were good, which came at $1.9bn. The company was also able to increase its production and deliver 499,550 vehicles in the year 2020. This is a huge jump to last year’s deliveries of 112,000 vehicles.
Risks to consider
The company will face tough competition from other car manufacturers. Chinese electric car companies like NIO and XPeng are aggressively targeting its market. Tesla is working on autonomous vehicles without any human intervention. If the company fails to satisfy various safety norms then it will negatively impact the company’s reputation.
Tesla shares had a good run in the past few years. A lot of funds have purchased the stock and they might book profit. The company’s stock has been very volatile in the past. Tesla is currently trading at a price-to-sales ratio of 22. The stock is expensive when compared to its five-year average price-to-sales ratio of 7.
My final view on Tesla shares
The company is a growth stock. Electric vehicles and battery companies will be a theme for investing in the next two decades. However, considering the risks mentioned above, I’m going to swerve buying shares directly in Tesla and instead would like to buy Scottish Mortgage Investment Trust for exposure to US tech companies and also benefit from the fund’s exposure to electric vehicle stocks.
Royston Roche has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. The Motley Fool UK owns shares of NIO Inc. 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.