Image source: Sam Robson, The Motley Fool UK
Imagine that five years ago you had decided that the outlook for the electric vehicle market looked promising, but you weren’t sure which companies could do well. I could have chosen to support both CHILD (NYSE: NIO) and tesla (NASDAQ:TSLA). If you had invested £1,000 in NIO and Tesla shares at the time, what would you have to show for it now?
Massively in the money
The short answer is: I would have a big smile on my face!
NIO stock has fallen almost 90% since 2021. But despite this, it is still down 20%. higher than five years ago. So my £1,000 investment would now be worth around £1,200.
Tesla stock has also fallen sharply from its 2021 highs. In fact, it has roughly halved since November 2021.
However, over five years, Tesla stock is firmly in the black. The price has increased by 845%. So my £1,000 bet would be worth around £9,450.
No company has paid dividends during that period. However, thanks to share price movements alone, the £2,000 invested five years ago would now be worth around £10,650.
In other words, making that move on NIO and Tesla stock five years ago would mean I had quintupled the value of my investment.
Looking forward instead of back
Given that good performance, what should I do now?
After all, five years ago I did not invest in any of the companies. But should I add some NIO shares to my portfolio today? Or maybe Tesla stock?
The answer to that question cannot be determined with a look in the rearview mirror. Past performance is no guide to what happens next, as evidenced by the wild movement of NIO and Tesla stock over the five years.
I remain optimistic about the prospects for the electric vehicle sector. Both NIO and Tesla benefit from growing user bases and proprietary technical features.
But NIO is still loss-making, so I’m still not convinced its business model can be consistently profitable. As for Tesla, I think more competition could hurt profit margins. Its valuation of 68 times earnings is too high for my taste. For now I don’t plan to buy any.
Practical lessons from past performance
Still, as an investor I like to learn lessons that can help me make more lucrative decisions in the future.
For example, the figures above reflect the change in NIO and Tesla shares, both denominated in dollars. But as a UK investor I must also consider the impact of exchange rate changes when buying foreign shares. In this case, a weakening of the pound in recent years would have worked in my favor. But the opposite can also be true.
I remain optimistic about the prospects for electric vehicles, but I also think there could be lessons learned on other investment topics.
For example, I think there is a huge opportunity in renewable energy.
But, as evidenced by Tesla’s much stronger stock performance over the past five years compared to NIO, choosing an industry with strong growth prospects is just one step for a smart investor. I also need to consider which companies could be the biggest winners within that sector.
