Why Tesla Dropped as Much as 5% Friday

what happened

Word spread quickly yesterday that almost 1.1 million Tesla (TSLA -5.02%) vehicles were being recalled. But that’s likely not why the stock tumbled today. At the morning’s lows, Tesla shares were down just shy of 5%. As of 1:48 pm ET, the stock hovered near that level, down 4.6%.

So what

The stock market isn’t always efficient, but simple math indicates that the recall isn’t the reason Tesla shares have been dropped for a second straight day. Tesla’s market cap has dropped by $75 billion over just the last two trading sessions, and the recall is not even going to require vehicles to be returned to service centers.

So what has caused more than an 8% decline in Tesla shares over two days? It may have a more simple explanation.

now what

The recall of almost 1.1 million Tesla EVs was to correct the automated window system from potentially failing to detect obstruction, causing a potential pinch hazard. It covers some Model 3s from as far back as 2017 and newer versions of Models X, S, and Y. Tesla CEO Elon Musk took to twitter to add a little more color to what the National Highway Traffic Safety Administration (NHTSA) published.

The company said it wasn’t aware of any warranty claims, let alone injuries, from the problem. Musk noted the vehicles will all be fixed with what he called “a tiny over-the-air software update,” and questioned whether the terminology from the NHTSA should change for vehicle software updates. He didn’t want to even use the term “recall,” calling it “outdated & inaccurate” with a fix that doesn’t require the car to be physically serviced.

Although the recall had the headlines, Tesla shares are more likely to be lower over the past two days in line with the tech sector of the market in general. With the Federal Reserve interest rate hike this week, some investors see the risks of recession increasing. A stock like Tesla with a valuation representing a forward price-to-earnings ratio of about 65 is a prime candidate to get hit the hardest.

Howard Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla and Twitter. The Motley Fool has a disclosure policy.

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