Tesla stock is down. Here’s what’s really behind the slide.

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Tesla shares are down. Recalls and uncertainty could be responsible. A third reason, however, is the most likely. Joe Raedle / Getty Images

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Tesla stock cannot go up indefinitely and ultimately fell on Tuesday. Reports of recalls and uncertainty over the company’s deal with Hertz are two potential reasons, but a third factor may be the real key.

Tesla stock (ticker: TSLA) lost 1.6% in morning trading, after falling as much as 5% before the open. The S&P 500 and the Dow Jones Industrial Average rose 0.3% and 0.2% respectively.

Tesla’s stock was in tears. It has risen eight of the past nine trading sessions and gained 70% in the past three months. Its actions were supported by signs that the company has truly won the electric vehicle race, signing a deal with Hertz (HTZ) for 100,000 electric vehicles. Companies such as Ford Motor (F) and General Motors (GM) have announced huge spending plans in an attempt to close the gap.

So it’s no surprise that the stock reacts 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 recall 11,700 vehicles.

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

Musk has repeatedly assured investors, on Twitter (TWTR), that Tesla sells every car it can make and doesn’t give any discounts these days.

Hertz shares initially took a hit from the tweet, starting with a loss of around 6% in pre-market trading. But nothing happens in a vacuum.

Hertz’s counterpart Avis Budget (CAR) released better-than-expected results Monday night, pushing the stock up about 1% in pre-market trading, despite gains of around 360% since the start of the year. ‘year. Demand for rental cars and operating parameters are improving.

By late morning it seemed like mem traders were squeezing short sellers, just like they did with GameStop stocks earlier this year. Avis stock rose 162% to $ 450 per share, pushing Hertz up around 16%.

For Tesla shares, the recall could be more important than the status of the sale to Hertz. Cars are being recalled due to a software communication error that may activate automatic emergency braking. The fix is ​​an over-the-air software update. Tesla has come under increased scrutiny by regulators over driver assistance features in recent months.

Additionally, Tesla recently introduced a “beta” version of its latest fully autonomous driving software to Tesla drivers who have qualified for the upgrade. Tesla believes its software makes vehicles safer. Regulators, however, have yet to adjust to cars improved by software updates and how to handle software changes to fix bugs.

Any news, however, could have sparked a massive sell off in Tesla shares. The title is extremely overbought, that is to say that it goes up quickly compared to its own history. When the going gets tough, stocks can revert to average. The relative value of Tesla’s strength is 94. A value of 50 is essentially normal and levels above 70 usually cause traders to look for a downside.

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As of Tuesday, Tesla stock has outperformed the S&P 500 by around 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 recent stock rally is pretty normal stock for the name,” the research firm said. With such outperformance, investors don’t really need an excuse to take profits.

Tesla’s stock still has a long way to go before it appears ripe for success.

Write to Ben Levisohn at [email protected]

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