If you want your investments to generate more than their share of excitement, you can't really go wrong with Tesla (TSLA 4.96%) these days. On Monday, management for the electric vehicle (EV) producer filed paperwork indicating it's looking to split Tesla's stock, which would be the company's second stock split in less than two years. Then CEO Elon Musk bolstered the bullishness typically linked to stock splits by suggesting in an interview with Axel Springer CEO Mathias Döpfner that Tesla could be mass producing artificial intelligence (AI)-powered robots as early as 2023. But aside from the excitement, do these (and a slew of other recent) headlines make Tesla a buy right now?
As always, it depends. Broadly speaking, though, for most investors the answer is no, they don't. There might just be a smarter option for the average person, and particularly the average person still building a buy-and-hold portfolio.
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The case for, and against, Tesla
It's a question investors wrestle with every day: Do I take a bigger risk in search of greater reward by betting on only a handful of stocks, or perhaps only one company like Tesla? Or, do I seek safety in numbers and buy something along the lines of the Invesco QQQ Trust (QQQ -0.48%), which is meant to mirror the performance of the Nasdaq-100 index?
The case for owning a name like Tesla certainly has its merits. Chief among them is the stock's performance. The fact that Tesla arguably needs to split its stock again underscores just how much price appreciation it's seen just since 2020, although the company's more than earned it. Last year's vehicle delivery tally of 936,172 EVs nearly triples 2019's pre-pandemic count of 367,500.
Perhaps more important, Tesla is profitable, banking $5.6 billion worth of net income last year.
And of course, it's still the early innings for the worldwide electric vehicle (EV) evolution. Mordor Intelligence estimates the global electric vehicle market will grow at an annualized clip of 23% through 2027, matching growth projections from the U.S. Energy Information Administration.
The opportunity, however, has finally attracted meaningful competition.
Take Ford Motor Company for instance. It's willing to spend as much as $50 billion on the development of a battery-powered vehicle lineup, indicating that up to half of its production by 2030 could be EVs. The effort to date seems to be worth it, too. The new Ford Mustang Mach-E is Consumer Reports' top electric vehicle pick for 2022, displacing Tesla's Model 3. Demand for the company's all-electric Maverick and F-150 Lightning pickup trucks has also been so insatiable the company had to stop taking orders for both.
Were it just Ford, the matter could be chalked up as a temporary fluke. But it's not just Ford. General Motors is also drawing consumer interest in its EV efforts. Smaller newcomers like Rivian Automotive and Nio are -- despite clear challenges -- turning heads, too. And, while it's gone largely unnoticed, luxury makers that compete directly with Tesla's higher-priced Model S and Model X are also gaining traction. For example, Audi USA believes up to 30% of its U.S. sales could be fully EVs by 2025, up from around 5% now, following last year's 53% increase in sales of its e-tron series of EVs and hybrids.
The EV market itself is growing, but it's difficult to determine how much of this growth Tesla will be able to capture for itself. While the risk of owning Tesla in recent years has been worth the reward, the nature of that risk is changing now; we've never seen Tesla forced to contend with real competition.
Time for broader bets
None of this is to suggest Tesla is doomed just because competition is now creeping in. Tesla looks like it will remain the premier name of the EV industry for a long, long time.
Investing is largely about managing risks though, and eventually, every company brings more than a little of it to the table. It's Tesla's turn and time to do so.
Given this backdrop (and as has always been the case when an organization faces sea change), the smarter play right now is owning a Nasdaq-based instrument like the Invesco QQQ Trust rather than one single component of the index. We don't know exactly what the future holds for Tesla, but it's a pretty reasonable bet that many if not most of the Nasdaq-listed names are facing more predictable futures than Tesla is at this point in time.
Take Nvidia, for instance. Its graphics card technologies are perfectly suited for data centers, and artificial intelligence applications in particular. In light of the fact that Mordor Intelligence estimates spending on AI will swell by an average of 26% per year through 2026, Nvidia is well-positioned for growth.
Alphabet is another Nasdaq-listed name with a fairly predictable future. As long as the people of the world care to use the internet, they're going to need a way of searching all of its offerings.
And then there's Amazon, another Nasdaq name with a healthy future, largely driven by strong growth of its cloud computing arm, Amazon Web Services.
Which of these three companies -- or the hundreds of others trading on the Nasdaq -- will perform the best? We don't know. That's the point, or at least part of the point. The other part of the point is, we don't have to pick a particular winner. We can own a piece of all of them, and participate in whatever growth each of them dishes out.
It would also be short-sighted to ignore the idea that each of these companies and most of their peers are not only riding the same tech-evolution growth wave but are helping one another fuel it. Cloud computing and hyper-targeted digital marketing are growth opportunities so big in scope that they're difficult to see.
This Nasdaq-listed stock grouping still includes Tesla's potential, by the way, which is currently the Nasdaq's fifth-biggest listing anyway.
Always start with safety in numbers
Bottom line? Indexing is always the safer, easier bet than picking individual stocks. When a company (or the world, for that matter) is at an inflection point, the risks of owning individual stocks are particularly high. That's especially true if all you own are individual stocks, and haven't built a foundation on a broad-based index fund that lets you plug into the market's long-term bullish tide.
In other words, while it's not sexy or fun, your first investment should almost always be an index. If it's not, you should be able to articulate exactly why it isn't and identify the exact risks of that decision.
Or, if you're still just stuck on Tesla, think about this: Standard & Poor's reports that nearly 80% of domestic equity mutual funds underperformed the S&P 1500 index. It's a testament to just how difficult it is to consistently pick market-beating stocks.
