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Bull vs. Bear: Could Tesla Be the Best-Performing S&P 500 Stock of 2022?

Motley Fool - Fri Jan 14, 6:00AM CST

Tesla(NASDAQ: TSLA) and the electric vehicle (EV) industry continue to capture the spotlight as growth investors look toward industries with paradigm-shifting technology and long-term prospects. From newcomers to legacy automakers, few industries are transforming before our eyes faster than the auto industry.

Tesla has developed a reputation for beating and even leading the market to new heights. Here are arguments why that may or may not continue.

A red Tesla Roadster drives down a road with mountains visible in the background

The 2022 Tesla Roadster. Image source: Tesla.

A staple in the S&P 500

Daniel Foelber: In May 2019, share prices of Tesla fell to a multiyear intraday (split-adjusted) low of $37.01 per share. The stock price is roughly $1,060 per share at the time of this writing. On Dec. 21, 2020, Tesla was added to the S&P 500, a sign Tesla had become a legitimate company whose business deserved to be reflected in one of America's most respected indexes. At the time, Tesla was the fifth-largest S&P 500 company. Today, Tesla remains the fifth-largest S&P 500 component not because the other components have outperformed Tesla, but rather because tech stocks as a whole have gained so much market share compared to other industries.

Consider that the top 10 largest companies in the S&P 500 make up nearly a third of the index's weight. Outperformance from top dogs like Apple, Microsoft, Alphabet, Tesla, and Nvidia have contributed major moves in the S&P 500 over the last few years. For Tesla to continue leading the charge higher, the company needs to continue to grow its top line while improving its profitability. It also needs continued economic and environmental support for transitioning passenger cars to EVs, not necessarily through federal credits, but from climate goals and consumer adoption.

Tesla was the single-best-performing S&P 500 component in 2020. But as Tesla grows, it becomes increasingly harder to outperform. Tesla stock increased over sevenfold in 2020 alone. If it were to do that now, it would have a market cap larger than Apple and Microsoft combined. Tesla may continue beating the market, but becoming the best-performing S&P 500 component in 2022 may be out of reach.

Investors might just start looking at valuation

Howard Smith (Tesla): Tesla stock had another great performance in 2021, rising about 50% for the year. That comes after its monster gain in 2020 of over 740%. So it makes some sense to believe that the streak could continue in 2022. After all, Tesla is expected to begin vehicle and battery production at two new manufacturing facilities during 2022, and EV market demand has just started taking off.

Tesla reported 936,172 vehicle deliveries in 2021, representing an 87.4% increase over 2020. When the company reports its full-year 2021 results, it's more than likely that it will announce its 2021 revenue exceeded $50 billion. The business is now profitable, with net income of almost $3.2 billion through the first nine months of 2021.

But for the first time, 2022 will include real competition. Traditional automakers including General Motors, Ford, and Volkswagen have new electric vehicles rolling out. And newer, fast-growing EV makers like Lucid Group, Nio, and XPeng are launching vehicles meant to compete with Tesla's demographic.

Tesla's business is likely to continue to thrive in 2022. But with other players finally also getting meaningful EV sales, investors will likely be pushing to compare progress and valuations. That means Tesla stock might finally trade on more than just promise. The market is forward-looking, and Tesla will without doubt get a high price-to-earnings valuation compared to others. But even if it more than doubles its net income to $10 billion in 2022, the P/E would be over 100 at its recent share price.

While Tesla stock might have another good year, it seems reasonable to think that as investors eventually assign it a true valuation, there might be some time before the business catches up to the share price. If that's the case, Tesla won't likely lead the market higher again this year.

Tesla's size has its limits

Tesla's years of market-crushing performance may be over in the short- to medium-term as the company takes time to grow into its valuation. However, Tesla could very well serve a key role in the future of mobility and renewable energy in a way that's hard to imagine right now. For that reason, investors may consider Tesla as a worthy candidate in an electric car stock basket, or put the stock on their watch list in case it goes on sale during a stock market sell-off.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Daniel Foelber has the following options: long February 2022 $185 puts on Apple and short February 2022 $180 puts on Apple. Howard Smith owns Apple, Lucid Group, Inc., Microsoft, and NIO Inc. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Apple, Microsoft, NIO Inc., Nvidia, Tesla, and Volkswagen AG. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.