The Tesla (NASDAQ:TSLA) stock price has had a pretty volatile week so far. On Monday and Tuesday, the shares dropped by as much as $65 following the launch of a safety investigation into its vehicles. Despite this 10% decline, the price is still up over 80% in the last 12 months. But what does this investigation mean for the company? And is this a buying opportunity or a sign of trouble ahead? Let’s take a look.
Regulators versus the Tesla stock price
Earlier this week, the National Highway Traffic Safety Administration (NHTSA) formally launched an investigation into Tesla’s autopilot feature of its vehicles. It comes after a series of crashes since 2018, which resulted in 17 injuries and one fatality. In each case, it was confirmed that the driver had engaged the autopilot feature. The investigation will dive into how the technology operates across Tesla’s Y, X, S and 3 Models to determine whether there’s a safety flaw. That’s about 765,000 cars. But what does it mean for the Tesla stock price?
The investigation has only just begun. Therefore, it’s too early to speculate a likely outcome. But it’s entirely possible that Tesla will be found liable if a defect in the vehicles or software was the cause of the accidents rather than human error. If this were to occur, the legal penalties would likely be substantial, as well as causing severe reputational damage to the firm. After all, no one wants to drive a car that could crash itself. I wouldn’t be surprised to see the Tesla stock price take a nosedive in this worst-case scenario.
However, previous investigations into autopilot accidents have failed to find any safety-related fault in Tesla’s technology. Therefore, it’s also possible that no damaging conclusion will come out of this investigation, thus allowing Tesla’s stock price to continue thriving.
What now?
Putting the investigation to one side, Tesla as a business seems to be doing rather well. Despite the impact of the semiconductor chip shortage, the company has been able to produce 206,421 vehicles over the last six months. That’s 151% higher than a year ago. Meanwhile, the number of vehicle deliveries has shot up by 121% to 201,304.
This impressive performance has enabled both revenue and profits to surge. But whether this growth can be maintained moving forward is starting to cause uncertainty. After all, Tesla has already started showing signs of competitive weakness in markets like China. And the development of hydrogen fuel cell technology continues to pose a potential threat in the future. But for now, at least, the firm looks like it’s staying ahead.
The bottom line
Last year’s rapid rise of Tesla’s stock price has pushed its market capitalisation to over $680bn today. That’s quite a lofty valuation compared to the underlying financials. So, I think it’s fair to say, the stock is currently being elevated by some substantial expectations for the future.
Whether these expectations can be met remains to be seen. But the ongoing investigation by the NHTSA certainly doesn’t help matters. Personally, I still think the valuation is too rich. Therefore, while this week’s drop in the stock price may be a buying opportunity for Tesla shares, it’s not one I’ll be taking advantage of.
