Tesla: Yesterday's Sell-Off Was Unwarranted

| About: Tesla Motors (TSLA)

If you have not had the chance to check out the video that contributed to Tesla's (NASDAQ:TSLA) stock price falling 6% on Wednesday, I highly suggest you do so. However, I believe that this price decline is only temporary for one reason:

The only way this video changes the valuation of Tesla is if the cause of the fire was from a part of the car itself, which Tesla has said was not the case. Here is the company's response:

"Yesterday, a Model S collided with a large metallic object in the middle of the road, causing significant damage to the vehicle. The car's alert system signaled a problem and instructed the driver to pull over safely, which he did. No one was injured, and the sole occupant had sufficient time to exit the vehicle safely and call the authorities. Subsequently, a fire caused by the substantial damage sustained during the collision was contained to the front of the vehicle thanks to the design and construction of the vehicle and battery pack. All indications are that the fire never entered the interior cabin of the car. It was extinguished on-site by the fire department."

Tesla's response makes it seem like what occurred was an accident, and the car would have caught on fire independent of the car's make. This incident reminds me of the day when news surfaced during trading hours that one of Boeing's (NYSE:BA) planes was on fire in London. The stock fell from $106.88 to $101.87, but the next trading day climbed back up to $105.66 (on a day the Dow fell 30 points). The cause of the fire was later determined to be the emergency locator transmitter, which is not even made by Boeing, but by Honeywell (NYSE:HON). What does this teach us? Since the cause of the fire was not caused by something that is inherent to Boeing as a company and its ability to operate, the stock quickly rebounded. In other words, the problem did not change anything about Boeing's fundamentals nor did it cause Boeing to spend extra money towards fixing other planes containing this device. The same situation applies to Tesla. In short, the video that surfaced on Wednesday does not change anything about Tesla's fundamentals, and therefore, should not cause the stock to fall.

I understand that Tesla was downgraded by Baird analyst Ben Kallo on Wednesday as well, but that only caused the stock to drop to the $185 range. However, once the video surfaced, Tesla fell another $10+ to $175 before settling at $181 [figure 1]. This is not the first time an analyst came out and said Tesla's price already reflects the best case scenario and it certainly won't be the last. In July, when the stock was in the $125 range, Goldman Sachs said Tesla was overpriced and the stock fell to $115. We all know that Tesla has since risen substantially-to the tune of 57%.


Between the time when Tesla closed on Tuesday at $193 and when it closed Wednesday at $180, nothing about the company's future had changed, other than the stock price dropping 6%. Neither the downgrade nor the video of the car on fire (assuming it was not related to a car fault) changes anything about Tesla in terms of the company's fundamentals and future growth. The sell-off seems excessive and has all the qualities of a panicked sell-off (like with Boeing and Tesla after the Goldman report). The stock may be volatile in the upcoming days with the uncertainty surrounding the government shutdown, but I am betting that Tesla will recover quickly once investors are reassured that the fire was not the company's fault. While I agree that Tesla is not a cheap stock and will fall if negative news that is related the core of the company surfaces, but again, the 6% sell-off was based on news that had nothing to do with the company's business model. Similarly, the downgrade is just the opinion of one analyst, who can be wrong, as we have seen with Goldman's prediction. One last thing: the analyst's price target for Tesla even after the downgrade was $187, or 3.4% higher than where it closed today.

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Figure 1

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.