What happened

Shares of Tesla (NASDAQ:TSLA) were slammed on Tuesday, falling as much as 19.7%. As of 10:05 a.m. EDT, the stock was down 17.3%

The stock's decline comes after the electric-car maker's stock was passed over in the S&P 500's latest additions to the index.

Tesla vehicles outside of the company's factory in Fremont, California

Image source: The Motley Fool.

So what

The market had been speculating that Tesla would finally be added to the S&P 500 after the company recently reported its fourth consecutive quarter of profitability under generally accepted accounting principles (GAAP). Indeed the growth stock's inclusion in the popular index was arguably already priced into the share price, as shares were soaring leading up to a possible announcement from the S&P 500 Index Committee.

Since there are many mutual funds and exchange-traded funds (ETFs) that track the S&P 500, investors were expecting an inclusion to increase demand for the stock as these tracking funds picked up shares of the electric-car maker to reflect an S&P 500 inclusion. But the S&P 500 Index Committee only added Etsy, Teradyne, and Catalent to the index.

Now what

Tesla stock's sharp decline on Tuesday extends a sell-off for the stock last week. Investors seem to be taking profits on the stock after an incredible 1,000 percent gain between the end of August last year and the end of August this year. Even after the stock's sell-off over the last week, shares are up 690% over the past 12 months.

The stock's big pullback is a good lesson for investors analyzing Tesla stock. Investors should remain focused on the stock's underlying business potential and its intrinsic value relative to its stock price rather than speculating about near-term catalysts for the stock that are outside of management's control.

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.