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Tuesday, June 29, 2010

Tesla's big day

Today was a great day for Tesla Motors and its CEO Elon Musk. Both got tons of favorable publicity — opening the NASDAQ market this morning — and wads of badly needed cash as the company enjoyed a wildly successful IPO.

By any measure, the IPO was a huge success:
  • The offering was expanded from 11.1 to 13.3 million shares.
  • The offering price was raised from the planned $14-16 to $17/share; and
  • The stock rose 40% in the first day of trading to close at $23.89, creating a market cap of about $2.2 billion
All this on a day when the Dow fell 2.6% (the NASDAQ 3.8%) as common investors panicked in the face of worsening economic news, and in a year where IPOs are few and far between. (My theory is that the stock defied the market because TSLA stock buyers were a combination of rich environmentalists that buy the cars and hot stock faddists who buy the story.)

(As with most Tesla financial news, the best reporting came from VentureBeat reporter Camille Ricketts.)

By selling almost 909,000 of his own shares, the 39-year-old Musk grossed $15 million, while his remaining shares were worth more than $650 million. Once the lockup is over, this presumably will allow him to pay some of his bills and start to resolve his long-deferred divorce settlement. After going broke, it also amounts to a personal vindication of the vision of the billionaire serial entrepreneur.

In fact, the LA Times found an Edmunds.com analyst who saw this as more of a referendum on the Tesla and Musk star power than its business or the industry at large:
"It's all the hype that's been built up, the first-day craziness," [editor John O'Dell] said of Tuesday's stock surge. "I would not take what's happening as a referendum on the EV market overall. It's unique to Tesla and Elon Musk and his reputation and persona."
Now that they’re a public company, the real scrutiny begins.

Ricketts has a list of 10 key questions for the company and its investors. Some are the obvious ones — when will Tesla stop losing so much money and how will it support the stock (and the balance sheet) when its second product is two years out. Others are less obvious, including how will Tesla balance its two strategic investors — Daimler and Toyota — who gave the company legitimacy, technology and (competing) potential exit strategies.

Others are also asking piercing questions. For example, John Gapper of the Financial Times wonders why investors are (apparently) so sanguine about having a part-time CEO of a multibillion dollar (market cap) company. Yes, Musk apparently fancies himself the greatest entrepreneur (and perhaps greatest tech CEO) of all time, but even Steve Jobs only managed to run two companies (Pixar+NeXT, Pixar+Apple) while Musk has three (Tesla, SpaceX and SolarCity).

One of the other questions Ricketts asks is how Tesla’s planned Model S sedan will compete with rival offerings from Chevy and Nissan — two well-capitalized manufacturers with better distribution. There’s also Fisker, the other major startup EV company, which used $20m of its $529m in stimulus funds to buy GM’s shuttered Delaware plant — part of its plan to help stimulate Finland’s economy.

Right now, electric vehicles are niche products: Tesla has sold 1,100 cars in two years — less than the total number of cars sold every two hours by the incumbent vehicle makers. The Model S and its rivals all hope to be the Camry (or Taurus) of electric cars, albeit at a healthy price premium (even with subsidies).

Into this niche are coming GM and Nissan right away, Fisker and Toyota soon after, and probably Ford, Honda, Chrysler, the Koreans and the Chinese by 2015. So far, the cars are 20-50% more expensive than their internal combustion counterparts. Meanwhile, the economics and green footprint of these vehicles depend on both the cost of gasoline (retail or with externalities) and how that compares to the real cost of grid power.

Meanwhile, sales are flat for the rest of the auto industry (at least in the developed world) with too many companies and factories chasing too few buyers. Even if electric cars increase their share of the market, they’re not going to grow the overall market, and that existing capacity (both manufacturing and distribution) will chase wherever the market goes.
The best case: the EV market grows rapidly and the rivals are slow to enter (unlikely) or are unable to match Tesla’s innovative products. The worst case (pick one): the market grows slowly, the prices remain high, a political shift reduces federal subsidies, or rivals (such as GM or Nissan) reach the mass market first.

I think the Tesla team should celebrate a well-deserved 4th of July weekend. After that, it’s back to work on trying to stay ahead of what will inevitably become a price-sensitive commodity business.