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The popularity of Tesco (LSE:TSCO) shares has proven to be well-founded in recent years. Since its October 2022 inflation lows, the UK’s flagship supermarket has leveraged its scale and Clubcard loyalty programme to protect and expand its market share. And by the end of 2024, loyal shareholders were rewarded with an 80% gain.
Moving into 2025, this upward trajectory has continued, delivering a further 8.7% total return, slightly outpacing the FTSE 100. That means any large investor who put £100,000 to work earlier this year has so far earned a tidy £8,700 profit – not bad for six months.
The question now is, can it continue to climb from here? Or should investors start considering taking some profits?
What’s driving growth?
As previously mentioned, Tesco has been busy expanding its market share, from 26.7% in October 2022 to 28.1% today – the highest in almost a decade. That may seem like a small difference. But when scaled up to the 70 million population of Britain, that’s very roughly 980,000 new shoppers walking through its doors. And the impact of this is reflected in its strengthening financials.
Its price-matching schemes have worked wonders in defending itself against discount retailers like Aldi and Lidl. At the same time, by expanding its Tesco’s Finest range, the supermarket has equally started luring customers away from its premium competitors like Waitrose and Marks & Spencer.
There are obviously other factors at work here. But overall, this has translated into accelerating like-for-like sales growth, pushing revenues to record highs. In turn, profits and free cash flow have expanded, paving the way for lower debt levels and more generous dividends.
Where next?
Even with all the progress made, the general consensus from institutional investors suggests that Tesco shares still have room for growth moving forward.
Deutsche Bank is seemingly the most bullish right now with a 440p price target driven by expectations of further market share gains. And if this projection’s accurate, that means today’s £108,700 investment could grow to £118,100 by this time next year – an extra £9,400.
While exciting, forecasts are sadly never set in stone. Even Deutsche admits to several threats being on the horizon for this business. And one of the biggest concerns is an escalating price war, particularly from Asda.
Given that supermarkets already operate with razor-thin margins, even a small trimming of gross profitability could slow Tesco’s pace. And this is a threat that investors will have to watch carefully moving forward. Having said that, Tesco has gone through price wars before. And while they have been disruptive in the short term, in the long run, the firm has always managed to stay on top.
All things considered, I don’t think it’s unrealistic to see earnings growth start to slow in the near term. Whether that warrants trimming an existing position ultimately depends on individual investor’s goals and risk tolerance. But when looking at this business from a long-term perspective, Tesco shares still seem worthy of a closer look, in my opinion.
