Tesla (TSLA +0.30%) and Apple (AAPL +2.62%) have very little in common except for the fact that both stocks are top 10 holdings in the Nasdaq Composite and have been exceptional investments over the past decade.
But while Apple stock held up better than the Nasdaq in 2022, Tesla stock has gotten absolutely crushed -- down 73% in the past year.
Here's the buy case for Tesla and Apple right now so you can decide which stock -- or both, or neither -- is right for you.
Image source: Getty Images.
Tesla offers an attractive risk-reward
Daniel Foelber (Tesla): I think Tesla is going to outperform Apple over the next five to 10 years. So, when it comes to which is the better buy, I'd go with Tesla. However, Tesla is a far more volatile, risky, and stressful investment. And for that reason, it's a stock that's probably best avoiding if you don't want to deal with the drama, if you have a shorter time horizon, or have a lower risk tolerance.
What makes Tesla such an exciting stock right now is that its fundamentals are finally catching up with the stock price. The argument that Tesla is being priced for what it could become far into the future isn't as easy to make now that the stock has collapsed.
But whether you love or hate it, there is no denying that Tesla has grown to become a very good company. It has an industry-leading balance sheet, operating margin, top- and bottom-line growth, and free cash flow. And a lot of those strides have come in the past two to three years as Tesla has gotten more consistent with its profitability while keeping up its torrid growth rate.
One of the greatest challenges of investing in a stock is that a company can be incredible, but the stock could still not be worth buying. During the dot-com bubble burst, many excellent companies saw their valuations outpace fundamentals. A classic example is Microsoft stock. If you bought Microsoft stock in early January 1999, you would have still been down on the position 14 years later. But by 2017, Microsoft was making new all-time highs. And today, the stock is about triple what it was during its dot-com bubble burst on Dec. 27, 1999.
But to stage that kind of recovery, Microsoft had to completely reinvent its business. The Microsoft of today is almost nothing like the Microsoft of the early 2000s. And I think Tesla will have to do the same thing if it wants to surpass its previous all-time high valuation of over $1 trillion in market cap. This is where the Tesla investment thesis diverges.
For those that think Tesla is just a car company, then production and deliveries would have to grow several times to justify Tesla surpassing its previous all-time high. But if you're in the camp that Tesla can monetize its electric semi-truck, robotics, and autonomous and self-driving technology, and grow its renewable energy business -- then Tesla, 25 years from now, could follow in Microsoft's footsteps and be a completely different company with a much higher valuation.
All told, the risk-reward for Tesla makes a lot of sense at these levels -- but only if you accept ahead of time that it's going to be a bumpy ride.
NASDAQ: TSLA
Key Data Points
Better valuation
Howard Smith (Apple): The sell-off in Apple shares has the stock valued below the $2 trillion level for the first time in nearly two years. It also marks the same market capitalization at which the stock was trading back in August 2020. After Apple has lost one-third of its value in the past year, now is a good time to buy Apple shares.
Recent concerns have been that shipments of the company's new iPhone 14 Pro have dropped due to manufacturing struggles in China and that demand could be lower as consumer spending slows in the current economic environment. That has also led some analysts to lower estimates for sales of iPads and Mac computers, adding to concerns for lower earnings. That scenario does add short-term risk to buying the stock now.
But the Apple ecosystem remains a great long-term business. The company generates tons of cash and returns it to shareholders in the form of both dividends and share repurchases. Those stock buybacks have reduced Apple's share count by more than 20% over the past five years.
AAPL Shares Outstanding data by YCharts
That gives existing shareholders more of a stake in the iconic company. With Apple's stock price drop, it is now trading at a better valuation based on price-to-earnings ratio than has seen in almost three years. Even if earnings growth stalls this year, a P/E of around 20 represents a good level to own this proven company without the risks associated with other, less mature technology and growth companies.
NASDAQ: AAPL
Key Data Points
Two compelling buys now
Tesla and Apple could both fall quite a bit more. But there are excellent reasons why now is a good time to own either company. Tesla and Apple are in great shape to handle a recession, even if it means short-term margin compression and slowing growth.
Each company also offers a path toward multidecade growth by expanding the core business and also monetizing new investments. For Tesla, long-term growth means expanding its electric vehicle offerings outside of passenger cars and making money from software and robotics. For Apple, long-term growth means selling more consumer electronics while also growing its services and financial products like Apple Pay and Apple Card and its entertainment services like Apple TV and Apple Music.
Add it all up, and there's a lot to like about adding shares of Tesla or Apple to a diversified portfolio.
