Last week, the much revered electric car maker Tesla Motors
('Tesla')(
TSLA
) saw its initial public offering ((
IPO
)) on the NASDAQ exchange - the first from an American car company
since Ford (
F
) in 1956.
The influx of buyers on the first day alone pushed Tesla's share
price 40% higher in what was the second largest first day advance
for a US IPO this year (first largest was Financial Engines (
FNGN
)).
Tesla sold 15.3 million shares in its IPO last week at $17 per
share, including the exercise of an overallotment option (activated
due to high levels of demand) totalling around 2 million shares,
with 14% of the company now sold to the public. All told, the
company raised $226 million in the IPO, which it plans to use to
move into production its new line of the more affordable, but very
attractive looking 'Model-S' sedan. Before the launch of the
Model-S, which is due to start appearing in 2011, Tesla was solely
focused on producing the Tesla Roadster, a high end electric sports
car which sells for a little over US$100,000.
Tesla benefited from a massive amount of press coverage for the
IPO, and in many ways, has been treated more like a technology
story, akin to Google's IPO (
GOOG
) rather than a car manufacturer, partially due to its decision to
list on the tech laden NASDAQ and undoubtedly boosted by the fact
that CEO Elon Musk was a co-founder of PayPal.
Since IPO Tesla's shares have managed to hold onto some of the
early impressive gains, rising as high as $30.42 in their second
trading day, and generally held steady above the $20 per share
mark, closing last Friday at $19.20, valuing the company at US$1.8
billion. Musk, who originally put $70 million of his own money in
the company, gained around $24 million from the IPO, with his
holdings (28.4%) now estimated to stand at around $510 million.
However, considering the company has to date sold around 1,000
electronic vehicles (EV's) and has losses of $290 million since its
inception in 2003, what has investors so revved up about Tesla?
The main selling point for Tesla is the market they are in,
which is expected by many to expand exponentially as Western
economies move away from fossil fuel powered vehicles to other
alternatives. Tesla is hoping its new Model-S car will allow it to
tap into this wider expanding market. Taking into account current
subsidies for individuals who buy electric in the U.S., the Model-S
price tag will be just a smidgeon under US$50,000. As part of this
ambition to move toward mass market production Telsa recently
acquired a manufacturing facility from Toyota (
TM
) in Fremont, California which is capable of producing half a
million vehicles per year.
However, critics of Tesla are quick to note that the company is
yet to post a profit, and is not expected to for several more
years. Tesla has also faced numerous liquidity and capital raising
problems in the past, burning through $230 million of cash since
2003, according to the Reuters news agency, while at the same time
generating only $148 million in revenues.
Advocates of Tesla on the other hand see a car expanding from a
niche of high end sports cars to a more wider appealing sedan.
While the Model-S is certainly lower priced, at US$49,000, it is
still very much outside of the low end, low margin part of the
market. If Tesla can position itself correctly in the market, it
could build a larger, loyal consumer base and push for much wider
market share. Ultimately, one has to assume that if the brand is
strong and its market share is growing, it will eventually be
snapped up by a larger competitor looking to consolidate.
Competition in the EV market is heating up quickly. Toyota has
undeniably thrown large amounts of cash at developing its hybrid
electric cars, but this year both Nissan (
NSANY.PK
) and General Motors (
GM
) will launch new EV vehicles in the U.S. Both are aimed at the low
to mid range of the market. This in itself could be viewed as good
news and bad news for Tesla.
The good news is that for Tesla to truly thrive, it requires a
supportive and growing sector. For this to happen, all of the big
car manufacturers need to be in the race, as this will have a knock
on effect to vital support services around the EV industry - from
recharging stations to automotive centres that will not only have
parts in stock when required, but will be also to carry out work at
an acceptable cost. The bad news is Telsa will undeniably find it
difficult to compete on economies of scale with the big boys. This
will act as a major barrier to becoming a truly mass market car
manufacturer.
The strength of Tesla therefore, depends largely on the broader
outlook for the electric car market, and its own brand positioning,
which at the moment certainly appears to be targeting individuals
who want to buy electric, but are probably currently driving a
premium brand, like BMW (
BAMXY.PK
), Honda's (
HMC
) Acura or Toyota's Lexus.
Can EVs become widespread?
To date, and despite the wide media blitz they have received,
electric cars (including hybrid cars) have seen comparatively
little demand compared with their gasoline counterparts. There are
several issues that currently face the electric car market, which
one could argue will need to be fully addressed before the use of
EV's becomes truly widespread.
Firstly, while the production costs of electronic cars will
continue to fall as market uptake increases, it is still relatively
expensive for auto manufacturers to produce them. Until this issue
is resolved, mainstream demand for EV's is never likely to match
the demand for gasoline powered vehicles no matter what the other
benefits may be. This is a self fulfilling prophecy. As demand
slowly ticks upwards, economies of scale will improve and costs
will fall, which will in-turn improve margins and boost appetite
from big automotives to increase demand. The big question is not if
EV will replace combustion engines, but when.
The other problem facing the market are issues surrounding the
limitations of the vehicle's battery. Although, for example, EV's
can generally be charged using a standard household outlet, fully
charging the battery typically takes up to 12 hours. This is an
inconvenience that many would-be buyers may not be able to swallow.
Secondly, while the distance a car can drive on a fully charged
battery is improving; even Telsa's sedan will be limited to around
300 miles before requiring a boost. Many electric vehicles are
claiming distances much lower than this. For car owners driving
predominantly in their local area, this wouldn't be much of an
issue, but what if you want to drive from Boston to Philadelphia
(320 miles)? At the moment you would have to stop and charge the
battery along the way, and that would take a lot longer than
filling the tank up with gas.
There are 'fast chargers' available for electronic cars that
owners can have in their homes, which speeds up charging of EV's
significantly, however, they come at an additional cost. Several
groups are also working on a system where a car could simply pull
into a station and have a depleted battery replaced with a fully
charged one, but even this concept is many years away from any sort
of national rollout. The question again seems to be a matter of
when will EV technology catch up with many decades of research and
development into internal combustion engines.
Even charging a car as one would do at home, which at first may
seem quite trivial, isn't necessarily straight forward. What do
individuals who live in apartments or similar high rise
developments do, for example? Are property developers going to
install plugs in every parking bay?
So then, with these factors to overcome, one could certainly
suggest that Tesla faces an incredibly challenging market in the
foreseeable future. The large uptake of their float last week has
many asking if the company's valuation is already too high.
Investors would be wise to remember that Telsa isn't Google. It is
burning cash at a fair clip and is years away from
profitability.
There is certainly potential in Tesla to deliver exceptional
returns, and massive credit is due to the company for getting this
far, but the risks still appear very high. Timing is everything in
investing, but the jury is out on whether Tesla's time has
come.
Disclosure:
No position
See also
Nissan and the Electric Vehicle Battery
Conundrum
on seekingalpha.com