Tesla Stock Is Sliding. Just Don't Blame Hertz or Recalls. – Barron's Tech Companies

Tesla shares are dropping. Recalls and uncertainty could be responsible. A third reason, however, is most likely.

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Tesla stock can’t go up forever, and finally turned lower on Tuesday. Reports of recalls and uncertainty about the company’s deal with Hertz are two potential reasons, but a third factor may be the real key.

Tesla (ticker: TSLA) stock was down 1.6% in morning trading, following a slump of as much as 5% before the open. The S&P 500 and Dow Jones Industrial Average were up 0.3% and 0.2%, respectively.

Tesla stock has been on a tear. It has risen eight of the past nine trading sessions, and has gained 70% over the past three months. Its shares have been buoyed by signs that the company really has won the EV race, signing a deal with Hertz (HTZ) for 100,000 electric vehicles. Companies such as Ford Motor (F) and General Motors (GM) have announced enormous spending plans to try to close the gap.

No surprise, then, that the stock would react badly to potentially negative headlines. First, Musk himself tweeted that Tesla had yet to sign a contract with Hertz (HTZZ). Then came the announcement that the company would be recalling 11,700 vehicles.

The Musk tweet, however, was intended as a positive. The Hertz deal is Tesla’s first large fleet sale. Fleet sales tend to be lower-margin. Fleet buyers look for volume discounts and don’t often buy all the high-end options individual consumers do.

Musk has assured investors, on Twitter (TWTR), a couple of times that Tesla is selling all the cars it can make and isn’t giving any discounts these days.

Hertz shares initially took a hit because of the tweet, starting off with a loss of about 6% in premarket trading. But nothing happens in a vacuum.

Hertz’s peer Avis Budget (CAR) reported better-than-expected results Monday evening, sending the stock up about 1% in premarket trading, despite year-to-date gains of about 360%. Rental-car demand and operating metrics are improving.

In late morning trading, it looked as if meme traders were squeezing short sellers, as they did with GameStop stock at the start of the year. Avis stock was up 162% to $450 a share, bringing Hertz is along for the ride with a gain of about 16%.

For Tesla stock, the recall might be a bigger deal than the status of the sale to Hertz. The cars are being recalled because of a software-communication error that can activate automatic emergency braking. The fix is an over-the-air software update. Tesla has faced more regulator scrutiny over driver-assistance features in recent months.

What’s more, Tesla recently introduced a “beta” version of its latest full-self-driving software to Tesla drivers who qualified for the upgrade. Tesla believes its software makes vehicles safer. Regulators, however, still need to adjust to cars being improved by software updates and how to handle changes made to software to fix bugs.

Any news, however, could have sparked a selloff in Tesla stock. The stock is extremely overbought, which is to say that it is rising quickly relative to its own history. When things get extreme, stocks can revert to the mean. Tesla’s relative strength reading is at 94. A reading of 50 is, essentially, normal and levels of above 70 generally have traders looking for a drop.

Coming into Tuesday, Tesla stock has outperformed the S&P 500 by about 77 percentage points over the past 100 days, as Datatrek Research pointed out in a Tuesday note. That’s a lot, but not unheard of for Tesla.

“Crazy as it sounds, the stock’s recent rally is pretty normal action for this name,” the research outfit said. With outperformance like that, investors don’t really need an excuse to take profits.

Tesla stock has a long way to go before it will look ripe for a hit.

Write to Ben Levisohn at [email protected]

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