Why Tesla Stock Got Clobbered Tuesday — and Why It Could Bounce Back - Barron's

A Tesla Model 3 in a shopping Mall in Beijing.
Nicolas Asfouri/AFP/Getty Images

Tesla stock lost some $20 billion on Tuesday. Safety appears to be the main reason, even though Tesla cars are considered very safe. It shows that investors have some work to do understanding modern automotive safety—just like they had some work to do understanding electric vehicles when Tesla burst on the scene years ago.

Tesla stock (ticker: TSLA) stock closed down 2.8%, at $659.58, on Tuesday. The S&P 500 and Dow Jones Industrial Average, for comparison, closed down 0.2% and 0.6%, respectively. Tesla stock was up 0.7% at 664.13 in premarket trading Wednesday.

An individual fire involving a Model S Plaid edition is the first issue that might have weighed on shares.

The Plaid is Tesla’s newest, fastest version of the Model S. An individual accident or fire might not move any car stock—even Tesla—but the Plaid is new, and initial reporting indicated the car caught fire while being driven. What’s more, the New York Post reported, an employee, Bart Smith, of the brokerage firm Susquehanna International Group was driving the car.

Smith wasn’t immediately available to respond to an emailed request for comment.

The second safety issue weighing on Tesla stock might be a New York Times article about a family suing Tesla after a family member died in a crash they blame on Tesla’s Autopilot driver-assistance software.

Individual lawsuits, like individual accidents, are serious, but generally don’t wipe about $20 billion off the market capitalization of a company. But the market is adjusting to “active safety.”

Tesla, along with the entire automotive industry, is moving from passive safety systems to active safety systems. Passive systems are, essentially, things like seat belts and anti-lock brakes. They sit there until drivers, and passengers, use them. Passive safety systems aren’t controversial, and investors consider them big positives.

That isn’t always the case with active safety systems.

Active systems are features such as lane-keeping assistance and automatic braking. The car is doing something on its own. Active safety features are all part of what will eventually become self-driving cars. Putting lane-keeping assistance, adaptive cruise control, automatic emergency braking, and blind-spot warnings together can help enable a car to drive safely down the highway on its own.

Active safety systems also improve vehicle safety, but ceding control to computers makes drivers nervous. So for now, not all active safety features are considered universal positives.

That’s partly because of the potential for abuse. Tesla stock, remember, took a hit recently after a Texas crash in which investigators initially suspected no one was in the driver’s seat—the driver was suspected of showing off how a Tesla could drive itself. That isn’t how Tesla’s, or any other car company’s, active safety features are intended to be used. As it turned out, the driver was in the driver’s seat and Tesla’s driver-assistance functions were not turned on.

Third-party safety agencies, however, say active safety features make cars safer. A Tesla Model 3 is an Insurance Institute for Highway Safety 2021 top safety pick in the midsize luxury sedan category.

The IIHS calls Tesla’s automatic emergency braking system “superior” in avoiding vehicle-to-vehicle collisions and “advanced” in avoiding vehicle-to-pedestrian collisions. Tesla’s active safety systems helped it earn those ratings.

And every Tesla vehicle with an overall crash rating from the National Highway Traffic Safety Administration is rated five stars—the highest rating. Lots of other cars are five-star-rated, but Tesla is as good as any manufacturer.

Tesla, though, is a little more aggressive than others in talking about its self-driving features. That’s one reason Tesla safety is closely scrutinized. CEO Elon Musk has been tweeting about newer versions of the company’s autonomous driving software for weeks and promising big improvements over the course of 2021.

The tweets have led to heightened investor expectations. The most advanced versions of Tesla’s active safety systems can be purchased for $10,000. The features are delivered as a software upgrade without needing to come in for service. Tesla bulls believe more drivers will purchase systems, and more cash will come into Tesla coffers, as its systems improve.

But first, the market needs to move past its fears.

Write to Al Root at allen.root@dowjones.com

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