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Tesla's Surprise Just Shocked the Stock Market

By Dan Caplinger - Jun 3, 2021 at 4:44PM

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Wall Street punished the electric vehicle stock on a weak day.

Like it or hate it, Tesla (TSLA -2.05%) gets a huge amount of attention from investors. When news affects the electric vehicle pioneer, people take notice -- and the moves of its stock can affect the entire market.

Thursday was a generally weak day on Wall Street, as investor enthusiasm for popular meme stocks gave way to nervousness about the sustainability of their recent gains. Losses for the Dow Jones Industrial Average (^DJI -0.86%), S&P 500 (^GSPC -1.29%), and Nasdaq Composite (^IXIC -2.01%) weren't extreme, but a surprising announcement from Tesla in the middle of the day seemed to take the wind out of the market's sails and could point to trouble ahead not just for the automaker's stock but for markets more broadly.

Index

Percentage Change

Point Change

Dow

(0.07%)

(23)

S&P 500

(0.36%)

(15)

Nasdaq Composite

(1.03%)

(142)

Data source: Yahoo! Finance.

A double-hit for Tesla

Tesla shares fell by more than 5% on Thursday. The company's shareholders had to face a couple of new threats that could endanger the EV giant's leadership position across the globe.

Early Thursday, Tesla revealed a couple of different recalls. One will cover about 5,500 Model 3 and Model Y vehicles, as the manufacturer seeks to ensure that fasteners installing the shoulder seat belts for front-seat occupants are attached securely. A second recall covers about 2,200 Model Y SUVs, and will look at a similar issue that could potentially affect seat belt systems in those vehicles' second rows.

Red Tesla Model Y on pavement, with a city skyline in the background.

Image source: Tesla.

Those announcements followed on the heels of a Tesla recall issued earlier in the week. The concern there centers on brake caliper systems that could become loose and cause tire pressure loss, and involves almost 6,000 Model 3 and Model Y vehicles.

Yet the more damaging issue Tesla had to contend with involved a report from a third-party source. An article published on tech news website The Information reported that Tesla's order volume from China was down by about half in May from April levels. Citing internal sources, the publication asserted that Chinese orders for Teslas fell below 10,000 vehicles, down from more than 18,000 in April and 21,000 in March.

This calls into question whether Tesla is maintaining its competitive advantages overseas. Certainly in China, Tesla faces substantial competition from domestic producers such as XPeng (XPEV -3.72%) and NIO (NIO -4.32%). Having built a Gigafactory complex in Shanghai, Tesla is now counting on heavy demand for its EVs in China. If that demand doesn't materialize as expected, it could have huge implications for Tesla's growth trajectory not just there, but throughout the Asia-Pacific region.

Needing to keep up the momentum

The massive share price gains that Tesla produced in 2020 hinged largely on the idea that the electric vehicle maker would be able to duplicate its success in the U.S. market across the globe. Indeed, some investors theorized that Tesla's vehicles would get an even better reception in some foreign markets, especially those where higher consumer demand for sustainable energy options would help to give the company an advantage over makers of internal combustion-powered vehicles.

It's far too early to say whether Tesla has truly lost its edge in China. But with the possibility out there, shareholders appear to be reassessing Tesla's growth prospects -- and that impulse for reassessment could spread to other stocks as well.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NIO Inc. and Tesla. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$890.00 (-2.05%) $-18.61
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,706.74 (-0.86%) $-292.30
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,228.48 (-1.29%) $-55.26
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$12,705.22 (-2.01%) $-260.13
Nio Inc. Stock Quote
Nio Inc.
NIO
$19.05 (-4.32%) $0.86
XPeng Inc. Stock Quote
XPeng Inc.
XPEV
$21.24 (-3.72%) $0.82

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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