Why Tesla Stock Fell Sharply on Wednesday

(The Motley Fool)

Shares of Tesla (NASDAQ:TSLA) were pummeled early Wednesday morning. The stock fell as much as 7.4% early. As of 11:45 a.m. EST, however, it’s down only 3.1%.

The stock’s big hit this morning was likely due to a tweet last night from noted investor Michael Burry. The former hedge fund manager, who is well known for predicting and profiting from the subprime mortgage crisis, said he is currently shorting Tesla stock.

“So, [Elon Musk], yes, I’m short $TSLA, but some free advice for a good guy… Seriously, issue 25-50% of your shares at the current ridiculous price,” tweeted Burry. “That’s not dilution. You’d be cementing permanence and untold optionality.”

By shorting a stock, investors can make money when a stock declines. Of course, the opposite is true as well: The investor can lose money on their short position when a stock rises.

Following a near-800% run-up in Tesla’s stock price over the past 12 months, the growth stock’s valuation is becoming difficult to justify.

Tesla will need to execute with near-flawless precision going forward to justify its valuation. Specifically, the electric-car maker will likely need to keep growing its vehicle sales at rates of 30% to 50% annually, demonstrate even faster growth in its nascent green energy business, and make substantial progress toward autonomous driving.

Despite Tesla stock’s pricey valuation, investors may want to refrain from shorting the stock. Given the company’s stellar execution recently, betting against the automaker seems like a risky bet. After all, investors could easily just avoid the stock entirely if they are not comfortable with the stock’s valuation. In addition, shorting is generally considered very risky, and investors should be sure to fully understand the risks of shorting before they do so.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

Government Launches Investigation Into 115,000 Tesla Vehicles Over Suspension Issue
The NHTSA is looking into reports of failure in the company’s Model S and Model X.

Not for the first time, Tesla (NASDAQ:TSLA) is facing an investigation into the manufacturing of its cars. On Friday, the federal government’s National Highway Traffic Safety Administration (NHTSA) announced it will probe roughly 115,000 of the electric-vehicle maker’s cars over a safety issue with their front suspensions.

The investigation is initially taking the form of a preliminary evaluation on the vehicles, specifically the company’s 2015 to 2017 Model S sedans and its 2016 to 2017 Model X SUVs. The NHTSA received 43 complaints from consumers who detailed the failure of the left or right suspension fore links.

In February 2017, Tesla issued a service bulletin in which it said that such failures might occur because, “Some Model S and Model X vehicles may have been manufactured with front suspension fore links that may not meet Tesla strength specifications.”

The company added that, “In the event of link failure, the driver can still maintain control of the vehicle but the tire may contact the wheel arch liner.” The company suggested that the two suspension fore links be replaced.

Tesla has not yet commented on the NHTSA’s announcement.

The NHTSA has probed various aspects of Tesla vehicles since nearly the beginning of the company’s operations. Earlier this year, for example, the regulator announced that it was looking into reports of failures of the media control units (i.e., dashboard touchscreens) in certain Model S and Model X vehicles.

The NHTSA is compelled to investigate vehicle-related matters when it receives a significant number of complaints, so this is nothing far out of the ordinary for any manufacturer, let alone Tesla. Investors are therefore not likely to panic over this latest probe, although they should certainly keep an eye on it as it unfolds.

Share: