Assessing The Tesla IPO

Shares of Tesla Motors, maker of the exotic electric sports car, soared more than 40 percent from its initial public stock offering price of $17 on June 29 as if the company's lithium-ion batteries were booster rockets on the new TSLA NASDAQ stock ticker symbol. But after day-traders ran the stock up to above $30 the next day, it started its descent back to earth, closing at $19.18 on Friday.

The market had hardly seen a stock this hyped and loved by day-traders since the likes of Google, though some might instead compare Tesla's IPO to eToys or the infamous Pets.com. America loves the car business, and investors haven't been able to buy into a car company on the ground floor since Ford Motor Co. went public in 1956.

Another chance might be coming soon with the new GM's much-anticipated IPO, perhaps before the end of the year. This would set the stage for an interesting battle, with the markets deciding which company -- Tesla or the one Tesla CEO Elon Musk frequently criticizes -- is the better investment for the 21st century.

The big question this week is whether the early buyers of Tesla stock are romantics who see Musk as a 21st Century Preston Tucker? (Or the idealized version of the maverick automotive entrepreneur played by Jeff Bridges in the 1988 film Tucker: The Man And His Dream.) Is there something in the company's actual business model that makes Tesla look like a better buy than, say, staking a position in Apple, taking advantage of a recent decline in Ford shares, or even waiting for GM?

"It's a very risky investment, there is no question about it," says Joseph Phillippi of Short Hills, NJ, based AutoTrends, who spent most of his career on Wall Street as an auto analyst. "The automotive industry is a very complex thing, and a business that will suck capital like no other. They have yet to prove they know how to sort it all out."

There is no question that the hype and lure of the auto business drew star-struck investors. "Tesla brought in people who wouldn't normally invest, a lot of inexperienced IPO buyers," said Francis Gaskins of IPOdesktop. Just how many of the buyers were institutions versus individuals is very closely guarded information at the banks who handled the IPO for the upstart automaker.

A browse of the prospectus Tesla put out ahead of its offerings shows pretty clearly what the company believes are the speed bumps to realizing success and profit. First is that its future is heavily dependent on the timely launch of the "Model S," a four-door electric sedan it says will be ready in 2012. The U.S. Department of Energy decided to lend Tesla $465 million for the Model S, of which the company has already drawn down $45 million. According to Tesla, the goal is to eventually sell 20,000 Model S sedans per year at between $57,000 and $85,000 each. The more you spend, the greater the range of the car you get: The base model will go about 160 miles on a charge while the top-of-the-line should be able to do 300.

But Tesla, by its own admission, is behind on development. It has but one prototype. Car companies typically need several prototypes in order to undergo crash testing, a process that can easily take more than six months. Tesla also does not have its network of suppliers lined up, a process that can take more than a year. According to Jim Hall of Group 2953 Analytics in Birmingham, MI, there are molds needed to make certain body parts that can take 24 months to get right and validated. "I just don't see that they have the time or enough money to do what they say they are going to do," says Hall, who believes Tesla's endgame is not to build cars on its own but rather to sell the company and brand to another, bigger car company.

To take some eyes off the likely delays associated with the Model S, Tesla this week announced upgrades to the existing Roadster including a new front fascia, rear diffuser, improved seat comfort and internal finishes, sound dampening and a large touch-screen navigation system. "Although development of the Model S is our main focus, this shows that we still care a great deal about improving the Tesla Roadster," said Tesla CEO Elon Musk in a statement. "These improvements are a direct result of customer feedback and come only a year after release of Roadster 2.0, showing an exceptionally rapid pace of innovation. Where feasible, we will also offer existing customers the ability to purchase the upgrades now available in version 2.5."

Per the agreement with Lotus, the Roadster will only be built through 2011 and poten tially into early 2012. Tesla's Model S, set to debut "in 2012," could leave a gap of many months to a year if a new contract with Lotus isn't signed to backfill more Roadster sales. In any event, Lotus and Tesla won't be hitched forever: the recent SEC filing revealed that the next-generation Roadster will be built in-house by Tesla, meaning the company is going to have to parallel path its Model S development alongside building an all-new Roadster. That's difficult to do for a company the size of Tesla.

The true value of Tesla is hard to calculate. The company lists $145 million in total actual assets, but that has little to do with Tesla's appeal to investors. "It is essentially an 'intellectual property,' IPO, says Hall. "The company showed a lot of cleverness in taking an existing car chassis from [British boutique car builder] Lotus and integrating their electric drivetrain." But it doesn't have hard assets or even brand value yet to support the market value of the IPO. Tesla has a lot of possibilities that will be extremely hard to make happen in a very difficult economic environment."

CEO Musk has done an excellent marketing job of building up the Tesla brand in a short period of time, despite selling just a little over 1,000 electric roadsters at six-figure prices across 23 countries. "There are other electric car companies out there like Think, Fisker and Coda, but they haven't captured the imagination of Hollywood or Silicon Valley yet," says Los Angeles-based marketing consultant Dennis Keene. "Musk emanates the idea that he is out to change the world, and he is a good salesman."

Stardust around Tesla has been supplied by early investors like Google founders Sergey Brin and Larry Page. Musk himself is the founder of PayPal. Tonight Show host Jay Leno, actor George Clooney and former vice president and Nobel laureate Al Gore have been boosters.

AutoTrends's Phillippi, who saw Tesla's investor "road show," says Musk did a good job of contrasting his business plan against "Old Detroit."

Not to take it lying down, General Motors pulled together a hasty "business update" for investors on the same day as Tesla's IPO. On July 1, GM CEO Ed Whitacre Jr. appeared to the world via an Internet webcast from Austin, Texas, announcing that the Texas capitol would become one of the markets for the Chevy Volt launch later this year. GM kicked off a Volt drive between Austin and New York City that will conclude on July 4, a journey of exactly 1,776 miles to commemorate the nation's birthday.

Musk's case to investors for the IPO was assisted by both German automaker Daimler and Japanese titan Toyota taking minority stakes in Tesla in the last year, boosting the company's credibility. It is a testament to Musk's salesmanship that Toyota CEO Akio Toyoda, according to industry sources, pledged a $50 million investment after just 45 minutes with the South African-born chief executive.

Still, Musk has had to contend with a spate of troubling publicity, including stories related to his own cash problems and a messy divorce. Just about every news article leading up to the IPO pointed out that Tesla has never made money, cumulatively losing $290 million since its beginnings in 2004.

To make Tesla into a going concern that will continue to attract investor interest, Musk will have to keep up a steady flow of positive publicity and show progress on the Model S. Perhaps his biggest rival from here, though, is the established auto industry he so frequently bashes. "GM, Nissan, and Ford have EV's coming and awfully big marketing budgets," notes Keene.

GM is scheduled to launch the plug-in hybrid Volt by December. Nissan starts delivering the Leaf electric to customers in the fourth quarter. Ford will begin selling an electric version of its soon-to-be redesigned Focus. BMW has been testing a Mini EV in advance of launching its own electric that could get wider distribution before the Model S is even due to hit the market. Audi is similarly road testing an electric version of its R8 sports car in Germany. With the market for EV's unknown, especially in the U.S., that's a lot of competition for a potentially small pie.

The established automakers have made plenty of mistakes. GM and Chrysler filed for bankruptcy in 2009. Ford has posted almost a decade of annual losses before seeming to come out of it this year. Toyota is in the midst of a string of ugly recalls of both of its Toyota and Lexus brand cars and trucks.

But all these companies will have an advantage over Musk in the EV wars. While Tesla struggles to cobble together a network of some 50 company-owned stores around the world to sell and service its cars, the established companies have a vast network of dealers and service departments. And if their initial EV vehicles don't sell well, they can all afford to keep selling them while their "old fashioned" internal combustion engine models rake in the cash. Musk doesn't have that luxury or diversity of business.

There just isn't a lot that Tesla can do that is better or more efficient in electric vehicle development than what Detroit, German and Japan can produce. The main reason those companies haven't put EVs on the road yet is that they haven't seen a viable market for them while gasoline has remained below $3.00 per gallon throughout the U.S.

Musk hasn't proven yet that he knows what is at the heart of every company selling a consumer product, let alone something as expensive and complicated as an automobile: Knowing what the public wants and when they want it. A little over 1,000 vehicles in seven years spread across wealthy actors, hedge-fund managers and oil barons is a long way from selling 20,000-plus cars a year. At those sales volumes, Tesla, if it reaches its goal, will lose the very exclusivity that appealed to many of those well-heeled buyers who also browse around Bentley and Mercedes-Benz showrooms.

Musk gives the impression he is out to change the world. But he better keep his eye on his business plan first, or watch his share price sink below its first-day offering price.