This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
The S&P 500 (SP: .INX) delivered a 23% return last year, which was more than twice its average annual gain dating back to when it was established in 1957. It was led higher by some of its trillion-dollar constituents, including Tesla (NASDAQ: TSLA) and Meta Platforms (NASDAQ: META) which both soared by more than 60%:
Tesla and Meta are entirely different companies. The former manufactures electric vehicles (EVs), whereas the latter is the social media giant behind Facebook and Instagram. However, both of them are counting on artificial intelligence (AI) to deliver the next phase of growth for their businesses.
Which stock will be the better buy in 2025? Let's find out.
The case for Tesla
Despite its incredible run last year, Tesla stock is currently down 31% from its December record high. Although the company is packed with long-term potential, investors are concerned about its passenger EV sales, which appear to be rapidly declining.
Less than two years ago, CEO Elon Musk consistently told investors Tesla could grow its EV production by 50% per year on average. But the company sold 1.79 million cars during 2024, which was a 1% drop from 2023. It was the first annual decline since Tesla launched its flagship Model S in 2011, and the company simply can't increase production if the cars aren't selling.
Some early reports suggest a recovery is unlikely in 2025. In January, Tesla's sales plunged by over 50% year over year across Europe, which included a 75% decline in Spain, a 63% decline in France, and a nearly 60% drop in Germany. Sales also fell by 33% in Australia, which highlights how widespread the weakness really is.
Since passenger EV sales still account for 78% of Tesla's revenue, the declines are a serious concern in the short term. But most investors are looking further into the future, because there is a belief that products such as the company's AI-powered full self-driving (FSD) software, its Cybercab robotaxi, and its Optimus humanoid robot, could be orders of magnitude more valuable than passenger EVs.
The Cybercab will run entirely on Tesla's FSD software, so it will be capable of operating autonomously within a ride-hailing network, where it can haul passengers and even make commercial deliveries around the clock. According to Cathie Wood's Ark Investment Management, this could make up the lion's share of Tesla's revenue by 2029 and drive the company to an $8.2 trillion valuation, eight times what it's currently worth.
But Musk thinks Optimus presents an even bigger opportunity because it could be used everywhere from manufacturing facilities to households in the future, so it has significantly more use-cases than the typical car. His recent comments suggest the humanoid robot could rake in $10 trillion in revenue over the long term, making Tesla more valuable than the next five companies combined. For some perspective, the five most valuable companies today are worth a total of $14.8 trillion.
The case for Meta Platforms
Over 3.3 billion people use one of Meta's social networking apps every day. Since that number is approaching half the world's population, generating user growth is becoming more and more difficult. That's why the company is focusing on boosting engagement instead. Users see more ads when they stay online for a longer period, which translates into more revenue.
Meta has embedded AI into the algorithms on Facebook and Instagram, because it can rapidly learn what type of content people like to see, and it feeds them more of it to keep them interested. CEO Mark Zuckerberg told investors at various stages last year that this strategy was successfully increasing the amount of time users were spending online.
The new Meta AI chatbot is also helping the company drive engagement. It's available through all of Meta's apps, including Facebook, Instagram, WhatsApp, and Messenger, where it stands ready to answer complex questions or even suggest fun activities for you and your friends. Meta AI had 700 million monthly active users at the end of 2024, up 50% from just three months earlier.
The chatbot is powered by the Llama family of large language models (LLMs) that Meta developed in-house. The models are open source and have been downloaded more than 600 million times, which means Meta can crowdsource bug fixes and improvements from a gigantic community of other developers. That's how Llama quickly caught up to industry-leading closed source LLMs like those from OpenAI. Zuckerberg thinks the upcoming Llama 4 model will actually be the most advanced in the industry when it launches this year.
Meta generated a record $164.5 billion in total revenue during 2024, a 22% increase from the prior year. It marked an acceleration from its growth rate of 16% during 2023, which speaks to the company's momentum right now, thanks partly to its efforts in the AI space.
The verdict
Tesla was slashing the sticker price on most of its EVs to spur demand last year, and since sales still declined, the company's earnings per share plunged by 53% year over year. Since its stock also soared 62% in 2024 at the very same time, it now looks extremely expensive, with a price-to-earnings (P/E) ratio of 173.3.
That makes Tesla stock five times more expensive than the Nasdaq-100 index, which trades at a P/E ratio of 33.7. Meta stock, on the other hand, is actually cheaper than the Nasdaq-100, with a P/E of just 29.1:
TSLA PE Ratio data by YCharts
As a result, this choice comes down to valuation. It's hard to justify paying such a steep premium for Tesla stock right now, given the state of its core business. Since products such as the Cybercab and Optimus aren't expected to reach mass production until 2026 or later, passenger EV sales will remain the company's primary revenue source for at least the next 12 months, but probably longer.
Based on what we know from Tesla's January sales, the picture doesn't look very promising, and delivering positive returns might be an uphill battle for its stock this year.
Meta, on the other hand, is growing nicely at the top and bottom line, and yet its stock is cheaper than most of its peers in the tech sector. In my view, it has a much better chance to deliver upside in 2025 for those reasons alone, which makes it a much better buy than Tesla.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
