Over the long term, Tesla (NASDAQ: TSLA) shares have been a phenomenal investment. If an investor had bought them five years ago, they’d now be sitting on a gain of over 550% (in US dollar terms) – a magnificent return.

Recently however, the shares haven’t performed so well. In fact, if an investor had bought them two months ago – when Tesla’s share price was close to its peak – they’d now be sitting on a huge 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 purchase price (and that there were no trading commissions).

Looking at the share price today, it’s $356. That’s roughly 26% lower than the price two months ago, which means that the investor would be down significantly.

Now, we need to factor in the GBP/USD exchange rate when discussing Tesla stock (because it trades in the US). And this has come down from 1.27 to 1.26 over the last two months, which would have improved UK investors’ returns slightly.

However, returns would still be ugly. I calculate that for every £1,000 invested in the electric vehicle (EV) maker two months ago, the investor would now have around £748.

Ouch.

Takeaways

For me, there are two key takeaways here.

One is that portfolio diversification is crucial when investing in individual stocks.

Let’s say that the investor above was buying shares and that they only bought Tesla stock. As a result of the share price weakness, their portfolio would have taken a major hit (and they’d need a 35% gain from here to break even).

If they’d bought Tesla shares and a range of other stocks, however, they may have still done okay. Over the last two months, some stocks have performed really well. Take Visa, for example (one of my favourites). Since 17 December, it has risen about 11%.

The other key takeaway is that it’s important to pay attention to valuation when investing in stocks.

Back in December, Tesla had a sky-high valuation. At the time, the company’s price-to-earnings (P/E) ratio (a common valuation metric), using the earnings per share forecast for 2024, was above 200.

Now, just because a stock has a high P/E ratio doesn’t mean it can’t go higher. However, when the P/E ratio is sky-high like that, it dramatically increases the chances of wild share price swings, which is what we have seen with Tesla recently.

Worth considering today?

Is Tesla stock worth considering for a portfolio today after its big drop over the last two months? That’s hard to say.

There’s no doubt that the company has exciting long-term prospects. In the years ahead, it could be one of the biggest players in growth industries such as artificial intelligence (AI) and self-driving vehicles.

On the other hand, the valuation is still very high. Currently, the forward-looking P/E ratio is about 130 and that doesn’t leave much room for setbacks such as delays in the rollout of robotaxis.

Given the high valuation, I personally think there are better (safer) growth stocks to consider buying today.