Regardless of how long you've been putting your money to work in the stock market, it's been a challenging year. Since hitting their respective all-time highs between mid-November and the first week of January, the timeless Dow Jones Industrial Average, broad-based S&P 500, and growth-focused Nasdaq Composite, have lost as much as 19%, 24%, and 34% of their value, respectively. In fact, the S&P 500's first-half performance was its worst in over a half-century.
Despite this short-term pain, time has proved to be an incredible ally for investors. Every double-digit percentage decline in the major U.S. indexes throughout history (save for the current bear market) has eventually been cleared away by a bull market rally. In other words, patience has truly been profitable.
But it doesn't hurt if you invest in game-changing companies, either.
Here's how much $10,000 invested in Tesla on its debut day is worth now
Over the trailing-10-year period, the S&P 500 has returned a hearty 183%, and that's not including dividends paid. Yet among the 500 companies that make up the index, 20 of them have returned approximately 1,100% or higher over the trailing decade. Even having just one of these game-changing stocks in your portfolio for the past decade could have resulted in life-changing wealth.
But among the S&P 500's top-performing stocks over the past decade, one company is in a class of its own: electric-vehicle (EV) manufacturer Tesla (TSLA -0.34%). Note that Tesla was added to the S&P 500 in December 2020.
When Tesla had its initial public offering (IPO) on June 29, 2010, the company priced the 13.3 million shares it was offering at $17, which was above the $14 to $16 expected IPO range. However, since its IPO, Tesla has undergone two forward stock splits. It enacted a 5-for-1 split on Aug. 31, 2020, and recently completed a 3-for-1 split on Aug. 25, 2022. This means its split-adjusted IPO price is about $1.13 per share. Tesla's stock closed just shy of $300 this past weekend.
If an investor would have put $10,000 to work at Tesla's IPO price, that would have purchased 588 shares (not including fractional shares or any commission-related expenses). Accounting for the Tesla stock splits, this debut-day investor would hold 8,820 shares today. In other words, a $10,000 investment in Tesla's IPO in 2010 would now be worth a staggering $2,643,178. For those of you keeping score at home, this equates to a 26,332% increase in value in just over 12 years.
Here's why Tesla has been virtually unstoppable
How on earth does a stock go from being relatively obscure to the fifth-largest publicly traded company in the U.S. in just 12 years? The answer mostly lies with innovation and its CEO, Elon Musk.
Tesla is the first automaker in over five decades to have successfully built itself from the ground up to mass production. Even with the company contending with semiconductor chip shortages and China's zero-COVID policies, which have led to general parts shortages and production slowdowns at its Shanghai Gigafactory, Tesla looks to be firmly on track to surpass 1 million EVs produced and delivered this year. Through the first six months of 2022, the company has delivered 564,743 EVs.
To add to the above, EVs are a no-brainer growth opportunity over the coming decades. In order to combat climate change, most developed countries are emphasizing clean-energy initiatives. This includes clean-energy transportation for consumers and businesses. It's going to take decades for this vehicle replacement cycle to take shape, which provides Tesla with a long runway to grow its business.
Tesla's premium valuation is also a reflection of the company's competitive advantages and innovations becoming tangible. In addition to outpacing its North American competition in terms of production, the company's batteries provide better capacity, range, and power than virtually all of its mostly nascent EV competitors. The belief among a number of Wall Street analysts is that Tesla won't concede these first-mover advantages.
Tesla's greater than 26,000% gain since its IPO is the result of investors' faith in Elon Musk as a visionary as well. As CEO, Musk has brought four EVs into production, recently oversaw the opening of two new Gigafactories, and has offered plans to take the Cybertruck and Semi into production as soon as next year.
Lastly, Tesla has pushed into the profit column on a recurring basis. Over the past five quarters, it's produced a profit based on generally accepted accounting principles (GAAP) of between $1.14 billion and $3.32 billion.
Tesla might be headed for a breakdown
While there's no denying that Tesla's naysayers have been decisively wrong up to this point (myself included), there appear to be more lingering headwinds than catalysts for Tesla at its current market cap of $939 billion.
To begin with, the company is being treated as if it's not cyclical and will somehow escape the supply chain challenges currently afflicting other automakers. If the U.S. and global economies continue to weaken on the heels of historically high inflation, consumers are almost certain to pare back their spending. That means even next-generation automakers like Tesla could see reduced demand for EVs.
To build on this point, Tesla's shares ended this past week at a nosebleed multiple of 56 times Wall Street's forecast earnings per share (EPS) in 2023. Even taking into account that Tesla has made a habit of handily surpassing Wall Street's relatively low-bar EPS forecast, we're talking about a company that produces a commoditized product in an industry that's known for trading at a single-digit forward price-to-earnings ratio. Although Tesla does generate revenue from its energy storage and solar installation operations, the vast majority of its sales are tied to (pardon the pun) cyclical-driven EVs.
Something else to take into consideration is that Tesla is still getting a boost from the sale of renewable energy credits (RECs). Though the company is now profitable from the sale of its core product (EVs), nearly $2 billion of its close to $10.7 billion in aggregate GAAP income over the past 15 months has come from RECs. In short, RECs are inflating how profitable Tesla really is, which makes its nosebleed valuation that much worse.
But the biggest red flag of all might be Elon Musk. Despite being a visionary, Musk has created all sorts of legal, financial, and operating headaches for the company he runs. In particular, nearly every projection offered by Musk for when a new EV or technology will become available fails to come to fruition. Considering that these forward-looking innovations and new EV offerings are heavily built into Tesla's valuation, this is a big problem.
Although patience has paid off handsomely for long-term investors in Tesla, this top performer looks to be headed for a breakdown.