The Nasdaq-100 index is home to 100 of the largest technology companies listed on the Nasdaq stock exchange. It had a miserable year in 2022, declining by 33% as investors trimmed their bets on the high-growth tech sector.
But based on the annual returns of the Nasdaq-100 dating back to 1986, consecutive down years are incredibly rare. In fact, the index has only fallen two years in a row on one occasion -- during the dot-com crash between 2000 and 2002.
While the current environment poses its own unique challenges like red-hot inflation and rapidly rising interest rates, there's a likelihood that, based on history alone, the Nasdaq could be set for a bumper 2023.
That's because the index has delivered an average return of 51% in the first positive year following a loss, and given the rarity of consecutive declines, the odds suggest 2023 is likely to be green. But investors will need to see economic headwinds subside, and there are already some early signs that's happening.
If the Nasdaq-100 does soar this year, here's why electric vehicle powerhouse Tesla (TSLA -1.06%) might be the ideal stock to own.
Image source: Tesla.
A soaring Nasdaq will foster risk-on sentiment among investors
What makes Tesla the ideal stock to buy if the Nasdaq-100 rockets higher? Well, over the last 12 months, it has collapsed in value by 72% in a process called multiple contraction. It's when investors decide they want to pay a lower valuation for a company even though its financial performance hasn't necessarily deteriorated.
This happens for a few reasons, typically during periods when interest rates are rising and economic conditions are weak. When interest rates increase, investors can get a better risk-free return, which means they aren't willing to pay as high of a price for riskier assets like stocks.
There are a few challenges specific to Tesla, though. Naturally, with a weaker economy, consumers have less money to spend on big-ticket items like electric vehicles, and there is some evidence that demand has fallen, especially based on Tesla's order backlog, which declined by 60% between July and November last year.
Plus, CEO Elon Musk appears distracted by his recent $44 billion purchase of Twitter. At a difficult time like the present, investors would prefer to see him laser focused on Tesla, but that seems unlikely in the short term.
Based on its trailing-12-month earnings per share, Tesla stock trades at a price-to-earnings (P/E) multiple of 30 right now. That's a big step down from the multiple of 100 (and beyond) it traded at in 2022 and for many years prior.
That spells opportunity
Tesla did just deliver 1.31 million cars in 2022, which was a whopping 40% increase compared to the previous year. It's also expected to produce vehicles at an annual run rate of 2 million units in 2023, which, if it sells them all, would be another spectacular year of growth.
Tesla could be set for a bumper year of progress on many fronts. The company delivered its first semitruck to soda and snacks giant PepsiCo in December, and it plans to scale to an annual production rate of 50,000 units by 2024, so investors should see a substantial ramp-up during 2023.
Plus, the company also plans to rapidly scale production of its long-awaited Cybertruck this year. Both of these milestones mark Tesla's expansion beyond traditional passenger vehicles, inviting new pools of potential customers.
In 2022, the company opened two new Gigafactories in Texas and Berlin, and rumors are swirling about an imminent announcement for a brand-new factory in Mexico to further grow its production capacity.
2023 might be exciting for Tesla, but it's still a long-term story
If you recall from earlier, Tesla's current price-to-earnings multiple based on its trailing (past) earnings stands at 30 right now. But based on analysts' estimates of $5.15 per share in 2023 earnings, its forward multiple is just 22.
That means, if Tesla is to maintain a 30 multiple on a trailing basis by the end of 2023, and assuming it hits the earnings estimates, Tesla stock would have to rise by 36%. That's the benefit of buying shares in a fast-growing company -- its stock gets much cheaper the further into the future you look.
Speaking of the future, it's not all about making electric vehicles. The company is expanding into other areas with arguably just as much growth potential. One key vertical is autonomous full self-driving technology. Software tends to carry a high gross profit margin of 80% or more, so this should continue to be an important financial tailwind for the company as more Tesla vehicles hit the road.
Plus, Tesla has a booming residential solar power and storage business that is struggling to keep up with demand. And, at its recent artificial intelligence (AI) day, the company revealed a revolutionary humanoid robot called Optimus. While it won't be ready for sale until 2027, it could be a multibillion-dollar opportunity while revolutionizing low-skilled work.
If the Nasdaq-100 soars this year as history suggests it will, Tesla could be among the top performers. But any return it delivers might pale in comparison to its potential over the long term, so a five- to 10-year outlook could yield the best results.
