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Tesla Model S Fire Drags Shares Down

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Shares of Tesla Motors, Inc. (TSLA - Free Report) suffered their biggest one-day fall since Jul 16 on Wednesday after a video showed its Model S catching fire. Reportedly, a Model S electric vehicle caught fire on Tuesday evening near Seattle.

Tesla’s shares dropped 6.2% to $180.95 yesterday, as the news sparked investors’ concern about Tesla’s sales taking a hit. Investors were worried that Model S sales may decline if the fire resulted due to any defect in the company's battery packs.

While there is doubt about any damage to the vehicle’s lithium-ion battery pack, Tesla said that the incident took place after the vehicle collided with a “large metallic object,” which damaged the front end of the car. After the collision, the vehicle’s alert system alarmed the driver and thus there was no causalities reported.

Model S is equipped with a relatively new technology in the auto industry i.e. lithium-ion batteries. It is more powerful than the lead-acid batteries, but is more risk prone.

Incidentally, Tesla’s Model S has won the top vehicle safety rating from the National Highway Traffic Safety Administration (NHTSA). The car obtained a five-star rating overall and also for each of its subcategories. This was a coveted award for Tesla as only 1% of cars tested receive the 5-star rating from NHTSA.

This rating means that Tesla’s Model S sedan offers exceptional safety to the passengers as it has the lowest possibility of injury to passengers among all major cars sold in the U.S. The safety score of this sedan exceeded the score of most sports utility vehicles and minivans.

Different automakers are focusing on development of electric vehicles owing to their increasing demand. However, this incident raises concern about the safety of electrics cars. Two years ago, fire broke out in General Motors Company’s (GM - Free Report) Chevrolet Volt plug-in hybrid car after a crash testing was conducted.

In addition, Tesla’s recommendation was downgraded to Neutral from Outperform by an analyst of R.W. Baird. While the analyst is optimistic about Tesla’s performance in the long run, the combination of downgrade and the fire led to a decline in the company’s share price.

Tesla is expanding in Europe and China. The automaker has also signed a deal with Hertz Global Holdings, Inc.’s (HTZ - Free Report) to supply Model S electric vehicles to the latter’s Dream Cars section. With all these strategies undertaken by the company we are optimistic about it in the long run.

Tesla currently carries a Zacks Rank #1 (Buy). Ford Motor Co. (F - Free Report) , with a Zacks Rank #1 (Strong Buy), is performing well in the same industry where Tesla operates.

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