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Why Tesla shares don’t interest me but this UK growth stock does

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Tesla
Image source: Tesla

Growth stock Tesla (NASDAQ: TSLA) has seen its share price fall by more than a third since reaching its all-time high in January. Despite this, it’s up over 250% on a one-year view. Could the drop since January be an opportunity for me to buy in to the electric vehicle (EV) megatrend?

Well, I continue to have reservations about Tesla’s valuation, even at today’s lower share price. By contrast, there’s a UK growth stock that looks very buyable to me right now. I see a lot I like about it, and the EV story is part of the appeal.

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Tesla share price slump

After hitting an all-time high of $900 in January, Tesla’s shares are currently around $580. The slump has wiped getting on for $300bn off the value of the company

Nevertheless, its market capitalisation of $560bn still dwarfs global giants like Toyota (market cap $225bn) and Volkswagen (market cap $165bn). With Tesla facing ever-increasing competition, its forward valuation of 130 times earnings makes no sense to me.

Polarised views on the Tesla share price

I think I’m in good company. One of the great analytical minds in the financial world, Michael Burry, announced back in December he was shorting Tesla. He described the valuation as “ridiculous”. The share price was about the same then as it is today, and Burry is still betting against the stock.

However, Tesla also has plenty of high-profile supporters, notably much-followed growth stock devotee Cathie Wood. With Wood having called Tesla right in the past, and the market having pushed the share price as high as that $900 as recently as January, I’m not tempted to follow Burry in betting against the stock. Equally though, it’s not a stock I’m interested in buying.

A UK growth stock

I’m much more interested in pioneering high-performance plastics specialist Victrex (LSE: VCT). This growth stock is in the UK’s mid-cap FTSE 250 index.

At £24 a share, Victrex’s market capitalisation of £2bn is a tiny fraction of Tesla’s. It’s valuation of 29 times earnings looks very attractive to me. In addition to possessing growth-stock characteristics, it’s highly cash-generative, debt-free and pays dividends. The prospective yield is a handy 2.3%.

Victrex serves a range of end markets across industrial and medical sectors. It has a long history of identifying areas of future demand and investing ahead of them. The EV market is one of a number of current targets. Indeed, management told us last month it’s “closing in on a new E-mobility business win”. In addition, it has “a growing number of development programmes”.

This growth stock also has risk

Many of Victrex’s industrial end-markets are cyclical, while its medical business unit has suffered due to a fall-off in elective surgery during the Covid-19 pandemic. As such, a reversal in the green shoots of post-pandemic recovery could hit the company’s earnings expectations.

Its earnings multiple is much lower than Tesla’s, but it’s still pretty punchy for a stock that’s expected to post high (but not hyper) growth. If it doesn’t deliver the expected growth, the shares could de-rate to a lower earnings multiple.

On balance, my personal risk-reward appetite leads me to see Victrex as a growth stock I’d buy, while remaining uneasy about Tesla’s valuation at its current share price.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. The Motley Fool UK has recommended Victrex. 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.

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