Over the long run, Tesla (NASDAQ: TSLA) shares have been an outstanding funding. If an investor had purchased them 5 years in the past, they’d now be sitting on a acquire of over 550% (in US greenback phrases) – an impressive return.

Not too long ago nevertheless, the shares haven’t carried out so nicely. The truth is, if an investor had purchased them two months in the past – when Tesla’s share price was near its peak – they’d now be sitting on an enormous loss.

The shares have tanked

On 17 December 2024, the shares closed the day at $480. Let’s say that that was the investor’s buy price (and that there have been no buying and selling commissions).

Wanting on the share price at present, it’s $356. That’s roughly 26% decrease than the price two months in the past, which implies that the investor could be down considerably.

Now, we have to issue within the GBP/USD alternate price when discussing Tesla inventory (as a result of it trades within the US). And this has come down from 1.27 to 1.26 during the last two months, which might have improved UK traders’ returns barely.

Nevertheless, returns would nonetheless be ugly. I calculate that for each £1,000 invested within the electrical automobile (EV) maker two months in the past, the investor would now have round £748.

Ouch.

Takeaways

For me, there are two key takeaways right here.

One is that portfolio diversification is essential when investing in particular person shares.

Let’s say that the investor above was shopping for shares and that they solely purchased Tesla inventory. Because of the share price weak spot, their portfolio would have taken a significant hit (and so they’d want a 35% acquire from right here to interrupt even).

In the event that they’d purchased Tesla shares and a variety of different shares, nevertheless, they might have nonetheless performed okay. Over the past two months, some shares have carried out rather well. Take Visa, for instance (one in every of my favourites). Since 17 December, it has risen about 11%.

The opposite key takeaway is that it’s vital to concentrate to valuation when investing in shares.

Again in December, Tesla had a sky-high valuation. On the time, the corporate’s price-to-earnings (P/E) ratio (a standard valuation metric), utilizing the earnings per share forecast for 2024, was above 200.

Now, simply because a inventory has a excessive P/E ratio doesn’t imply it could possibly’t go larger. Nevertheless, when the P/E ratio is sky-high like that, it dramatically will increase the probabilities of wild share price swings, which is what we now have seen with Tesla just lately.

Value contemplating at present?

Is Tesla inventory price contemplating for a portfolio at present after its massive drop during the last two months? That’s onerous to say.

There’s little question that the corporate has thrilling long-term prospects. Within the years forward, it could possibly be one of many greatest gamers in development industries reminiscent of synthetic intelligence (AI) and self-driving autos.

However, the valuation continues to be very excessive. Presently, the forward-looking P/E ratio is about 130 and that doesn’t go away a lot room for setbacks reminiscent of delays within the rollout of robotaxis.

Given the excessive valuation, I personally assume there are higher (safer) development shares to think about shopping for at present.