What happened

As of noon EDT on Wednesday, shares of Tesla (NASDAQ:TSLA)were trading about 9% lower. The stock, however, had been down by as much as 14.7% earlier in the day.

The growth stock's decline likely reflects some investors taking profits after its enormous run-up in 2019 and 2020. Further, some investors may have been spooked by the news that the electric-car maker's largest institutional shareholder had trimmed its position.

Tesla's Model S, X, 3, and Y

Image source: Tesla.

So what

It's not surprising that Tesla stock would take a breather. Between Aug. 31, 2019, and Aug. 31, 2020, the automaker's shares surged by 1,000%. Wednesday's decline was a continuation of a pullback that began on Tuesday, suggesting some traders are taking profits.

It's also possible Tesla's sell-off on Wednesday was partly driven by news that its largest institutional shareholder, the investment management firm Baillie Gifford, had reduced its stake in the company from about 6.3% to 5%. Fund manager James Anderson said in a statement to the press, however, that the move was for structural reasons. Tesla stock had grown into too large a position in its clients' portfolios, exceeding the firm's concentration guidelines.

Now what

The valuation of Tesla stock has certainly become difficult to justify. Investors should expect wild volatility to persist due to both its big recent gains and its high valuation.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.