Is the honeymoon with Tesla over already?

Tesla's stock fell below its IPO price of $17 on Tuesday, closing at $16.11 a week after its maiden offering.  The Palo Alto electric vehicle phenom fell about 16 percent on Tuesday and was down about 47 percent from the high of $30.42 during trading last Wednesday.

Tesla was able to raise $226.1 million in its IPO last week, despite never having had a profitable quarter since its founding in 2003.

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Tesla IPO update:

Elon Musk, the Chairman of Tesla, will be ringing the opening bell at the NASDAQ on Tuesday morning as Tesla celebrates the positive reception the company received from investors in their initial public offering.  

Tesla priced its IPO at $17 a share, above the anticipated range of $14 to $16.  Tesla and its shareholders sold a total of 13.3 million shares and raised $226 million.  We will be watching that stock price but today is a positive data point for greentech IPOs.

 

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Electric vehicle startup Tesla Motors is launching a much-anticipated initial public offering this week, the first IPO by an American car firm since Ford went public in 1956.  The event is much anticipated by Tesla's investors and its founders, certainly -- but the reaction of the market and of institutional investors remains to be seen. 

We reported on the Tesla IPO numbers here.  Here's a link to the most recent S-1.  More than $200 million has been raised from Elon Musk, Al Wahada Capital, a fund owned by the power and water authority of Abu Dhabi, Blackstar Investco, an investment arm of Daimler, and VC investors DFJ, VantagePoint Venture Partners, Valor Equity Partners, Technology Partners, et al.

Tesla looks to sell a 12-percent stake of 11.1 (just raised to 13.3 million) shares for a maximum of $16 a share, according to its SEC filing.  If successful, the IPO could raise over $200 million.

That's good, because Tesla definitely needs the money.

The startup has spent more than $250 million (about $70 million from Musk's now-depleted fortune), lost money every quarter since it was founded in 2003, and anticipates "continuing losses for at least the foreseeable future," according to the S-1. Tesla sold a total of 126 cars in the most recent quarter, according to the calculations of Michael Kanellos, editor-in-chief at Greentech Media.  That works out to 9.7 cars sold per week. 

Contrast that with the 6,000 cars DeLorean produced in 1981, and the 2,000 that shipped in 1982 and 1983. DeLorean Motor Company went out of business later that year.  

There are three questions for this company:

  • Will consumers continue to buy the roadster once the novelty has worn off?  (The Roadster is essentially a niche-market, feel-good "green" car for rich people.)
  • Will consumers buy 20,000 $50,000 Sedans per year in the face of rising EV competition?
  • And will institutional investors buy this stock despite a dismal profit picture? (Value stocks need to be based on revenue streams, not hope.)

 

IPO Roadshow

You can watch and listen to CEO, founder, and financial backer Elon Musk hype the offering in this IPO roadshow video.  Musk is occasionally coarse and seemingly jittery in the video -- or maybe it's just his trademark charismatic intensity.

Musk makes the following points:

  • The Tesla distribution system gives the firm a competitive advantage. In Musk's view, the current automotive distribution system is extremely inefficient -- it puts dealers at odds with the OEMs regarding service and inventory. Instead of having tens of thousands of cars on dealer lots, the Tesla uses a Just-in-Time delivery system with cars essentially being made to order.  (Which explains the somewhat deserted feel of the Tesla dealership parking lots.)  
  • Musk claims that Tesla's "DNA" is closer to an Apple or a Google than to GM or Ford.  In his words, "There will not be anyone who brings technology to market faster." 
  • Musk says that investors and customers such as Daimler and Toyota are "putting their money where their mouth is."
  • Musk anticipates having 50 dealerships worldwide by the time the Sedan is being delivered in 2012. 
  • Musk boasts that the Tesla Roadster Sport can "kick the ass of any Ferrari except the Enzo."

In terms of scaling the company, Tesla's hope rests with their Sedan, not the Roadster.  Musk sees the Sedan as merely "step two" and a stepping stone to Tesla becoming "one of the most important car companies of this century."  The Sedan will have pricing and model options that get up to 300 miles per charge and will serve as a platform for eventual SUV, Minivan and Cabriolet models.

Deepak Ahuja, the CFO of Tesla (formerly of Ford), also spoke at the lectern to potential IPO investors.  Here are some of his points:

  • Tesla had 514 employees in 2009. (They have more than 600 employees by now, and a spectacular burn rate to accompany that headcount).
  • It cost about $125 million to deliver the roadster.  It will cost about $400 million to deliver the Sedan including the Nummi plant.  These numbers are an indication of Tesla's capital efficiency, according to the CFO.
  • The base model Sedan is $50,000 after the tax credit but the pricing structure allows for a 30 percent "uplift" in ASP once improved range and other options are factored in.
  • Tesla looks to build 20,000 units of the Model S per year. 

Tesla has received about 2,200 reservations and deposits for the Model S sedans as of March 31.


Other EV Vendors Are Not Standing Still

Tesla has resurrected the EV and deserves respect for sheer audacity, as do their investors.  The company is a pioneer.  Still, we know what happens to pioneers. 

Waiting in the wings with their own EVs are the more mass-marketable designs from General Motors and Nissan.  Nissan’s EV, the Leaf, has a 100-mile range, a base price of $32,780, and goes on sale in the U.S. later this year.  GM plans to introduce the Chevy Volt in November.  BMW and Mercedes are certainly developing EVs.  Even Ferrari has an EV.

The competitive climate for EVs could look far different in 2012 and 2013.


Battery Technology Not Ready for Prime Time?

Serdar Uckun of Palo Alto Research Center (PARC) believes in the inevitability of EVs, but contends that now may not be the right time for their ascendancy.  He cites these significant gaps in battery technology:

  • The energy density of gasoline is more than an order of magnitude better than the best lithium-ion batteries on the market.
  • Batteries deliver less energy (and age faster) during sustained high-power operations.
  • Batteries have limited life spans measured as total charge-discharge cycles
  • These deficiencies result in limited range and load capacity compared to fossil fuel vehicles.
  • Further, these technology gaps render current batteries impractical as energy sources for vehicles that require continuous high-power operations.

How important are these considerations to mass-market consumers?  Is the current technology good enough?  Automobile purchases are based on far more than ROI, economics, and range anxiety.  Nobody considers the ROI when they buy a Porsche or a Hummer or a PT Cruiser.

Institutional Investors Weigh In

“The supply is my main concern,” said Tim Cunningham in a recent Bloomberg News article.  Cunningham helps oversee $57 billion at Thornburg Investment Management in Santa Fe, New Mexico, and is considering buying shares of Tesla. “Going from essentially almost zero units today and not doing the production themselves to going to producing 20,000 units in just a couple of years, that’s the scary part.”

From the same article: “Tesla’s a very high-profile deal, in a very sexy industry, with very heavy backing from some major partners, not the least of which is the U.S. government,” said Michael Yoshikami, who oversees about $1 billion at YCMNet Advisors in Walnut Creek, California. “There’s so much buzz around electric vehicles, it’s going to be well received.”

Still, “Tesla’s financials are horrible,” he said. “That’s why they’re doing the IPO -- they need the money.”

“Pretty much every established auto company, if electric gains traction, will have an electric car,” said Rochdale Investment’s David Abella in the Bloomberg piece. “The history of the automobile industry is littered with companies that tried to do it on a more boutique basis and didn’t make it. My bet is that we won’t be seeing Teslas in 10 years, but at least now there’s some hype, so investors might be able to trade on that hype.”

IPO Reality

So, as we watch the thaw in the financial markets, are the institutional investors, the "buy side," willing to overlook the lack of profits from the Tesla Roadster and let the concept come through?  Even if the real Sedan product -- and real profits -- might still be years away? 

In the words of VC investor and blogger at GTM, Rob Day, "The cleantech IPO candidate pool continues to look weaker and weaker.  Strong hype can't overcome negative margins and high cash burn -- at least in the absence of a pre-existing stock market bubble. But I do think there are a lot of great companies waiting in the wings for a second wave... if the market conditions allow it.  And if the market forgives this decade's first batch of cleantech IPOs for having a few belly-flops."  (Day might be talking about the likes of Amyris, Codexis, Tesla, Solyndra (IPO now withdrawn), Molycorp and Fallbrook Technologies.)

Despite those cautionary words, Camille Ricketts at Venture Beat reports on the excitement at secondary market sites here.  GeoMonitor rates the Tesla IPO a "subscribe" and values the Tesla common stock at $20.02 per share, representing a 33.5 percent upside from the mid-point of the offer price range ($15.00).

Two other transportation firms have stock offerings in the near future: Zipcar and GM.   In common with Tesla, those firms are unprofitable as well.