Why Tesla Stoke fell on Tuesday

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What happened

Shares of Tesla (NASDAQ:TSLA) fell sharply on Tuesday, falling nearly 4% as of 11:40 AM ET. The drop in growth stocks followed the electric car maker’s second-quarter report, which was released after the bell on Monday.

Tesla shares are likely to trade lower primarily due to a bearish day in the market as a whole. But an analyst’s note to investors about the stock’s foamy valuation may also affect the stock.

Model Y. Image source: Tesla.

so what

When Tesla announced its second-quarter results on Monday afternoon, shares initially rose several percentage points in after-hours trading. The optimism about the stock was not surprising, as the company’s revenue and earnings easily beat analysts’ expectations on both metrics.

Revenue nearly doubled year-over-year, to about $12 billion. This exceeded analysts’ expectations of $11.3 billion. Non-GAAP earnings per share (adjusted) were $1.45, topping analysts’ average forecast of $0.98.

But Tuesday’s sharp market downturn is likely to weigh on stocks. The S&P 500 is down about 1% at the time of writing, and the Nasdaq Composite is down about 2%.

Another reason for the stock’s drop on Tuesday could be the analyst’s decision to reiterate the stock’s underperformance rating following the release of Tesla’s earnings. While Rajvendra Gill, an analyst at Needham, acknowledged the improvements in the company’s cost structure, he also said that stock prices appear to be perfect for perfection.

What now

Despite the negative price action for the stock today, investors should be encouraged by Tesla’s record second quarter. Not only was the automaker’s financial performance impressive, but management said global orders for its vehicles had reached an all-time high. Additionally, Tesla reiterated its guidance for total deliveries in 2021 to grow more than 50% year over year.

Of course, it’s true that valuation is something investors should consider carefully. They should realize that Tesla’s high valuation has led to amazing growth for years to come.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of Motley Fool’s premium advisory service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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