I say stay away. First and foremost, investors should take note of the fact that most IPO's end up as losing propositions. In the case of Tesla, which lost over $55.7 million last year and will lose more this year, the bleeding has just begun.
The car manufacturing business is very capital intensive and Tesla only hopes to stem the tide in 2012 when it projects a production run of 20,000 Model S all electric sedans for $50,000 each.
The car will enter the market at a time when every major manufacturer and many minor manufacturers will be producing a competing car for less money.
Tesla would not be moving forward without a $465 million loan from the Department of Energy. The initial public offering raised $226 million. That means that if you ignore the existing debt load and just count the new loan its debt ratio is starting off badly, going to get worse, and Tesla will need additional capital before too long.
I think it is overly optimistic that Tesla can bring to market a car that is not fully designed and has no working assembly line, faster than its competitors. There is also a chance that it will never happen.
The upside versus the down side. The upside is the "cool factor". The downside is everything else.
If you were starting a business, would you be comfortable when the competition was numerous, better financed, more experienced, sold a cheaper product in greater variety and more options? Where is the sustainable competitive advantage? There is none. The cool factor is even nebulous. If BMW created an electric 3 series model I assure you it would be plenty cool, and the Tesla is so expensive they are making it easy for BMW to do so.
The IPO was great for the investment banks underwriting the deal. Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), J.P. Morgan Chase (JPM) and Deutsche Bank Securities(DB) all made money. Tesla now has working capital and money to pay interest on financing. Even day traders have a new toy to play with. However, investors that think they are getting in on something unique with a highly profitable future should think twice. Instead of juicing your portfolio, you could very well get shocked by this electric marvel.
|3 years||31 (19.0%)|
|4 years||15 (9.2%)|
|5 years||33 (20.2%)|
|It will be acquired by Toyota.||65 (39.6%)|
|$50,000 Tesla S sedan||59 (37.1%)|
|$45,000 BMW "3E" Elec. sports sedan||100 (62.9%)|
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He own shares and options of GS.