Has The Tesla Bubble Finally Burst?
It was only one incident, but the seeds of doubt have been planted. Shares of electric car maker Tesla Motors Inc. (NASDAQ: TSLA) lost traction yesterday afternoon after a video was released that showed one of the company’s electric cars engulfed in flames. The Model S, widely touted as one of the safest cars in America, caught fire near Seattle. According to officials, the blaze started in the vehicle’s battery pack and presented major challenges for firefighters to extinguish. It is thought that the cause of the fire was from a large metallic object hitting one of the battery pack’s modules. Firefighters thought they had the fire under control, but the blaze reignited. Water intensified the fire, so they switched to a dry chemical extinguisher.
A favorite of investor’s, Tesla has had a remarkable run this year with shares having risen more than 450 percent, but investors were alarmed yesterday that the fire could be an indication of a flaw in the company’s battery packs. Tesla shares tumbled $12.05 to $180.95 on Wednesday and are falling this morning, trading now at $170.28. Conversely, shares had hit an all-time high on Monday of $194.50. The 52-week low is $26.86.
Contributing to the stock’s decay was a downgrade. R.W. Baird analyst Ben Kallo slashed his rating on the stock from “outperform” to “neutral”, saying that he’s still bullish on Tesla’s long-term prospects, but the company has sizable milestones during the next 18 months that come with sizable risk. The brokerage firm said that significant advances in the company’s battery technology are in order and that Tesla’s stock value needs to be reassessed.
In an attempt to lock in gains, institutional investors have been abandoning their stakes in the company consistently this year. In September, institutional ownership of Tesla slumped to 66 percent from an 84 percent high in January. This has not affected the appreciation of the stock, but is an indication that shares are decidedly overvalued and probably due for a pullback. After all, what goes up, especially at the insane pace of Tesla shares, must eventually come down.
As for the fire, lithium-ion batteries have raised concerns in other vehicles. Battery fires occurred in three Chevrolet Volt hybrid vehicles after crash testing last year. General Motors (NYSE: GM) cited coolant leaks and damaged plastic casing around the batteries as cause of the fires. Earlier this year, Boeing Company’s (NYSE: BA) fleet of 787s was grounded for four months because lithium-ion batteries overheated or caught fire.
Disclosure: The author has no position in the stocks mentioned in this article, and does not intend to initiate any position in the next 48 hours.
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