What goes up must come down -- it's cliche that seems to be especially true in the dreary stock market of 2010. But even so, the rise and fall of electric car maker Tesla (TSLA) in the wake of its high-profile IPO seems to have been especially accelerated.
Tesla debuted on the public market last week, raising $226 million in an initial public offering priced at $17 a share. That $17 price had been lifted at the last minute from the original range of $14 to $16 a share, thanks to heavy demand among institutional investors for shares in the high-end electric car manufacturer.
Once Tesla shares hit the markets on June 29, they kept rising, surging 40% to $23.89 in a matter of hours. By midday Thursday, Tesla had reached $30.42 -- 79% above its offering price. Stories appeared in the media calling the stock a "game changer" and noting its ability to "electrify the IPO market."
That rise, it turns out, was just Act 1 in what is likely to be a long and tense performance from Tesla. The stock has fallen 47% from that high point. Even more troubling, it closed Tuesday 5% below its offering price, meaning that investors who bought the stock at the offering are already looking at paper losses after just over a week.
A Bellwether for Future Cleantech IPOs
That Tesla ran out of juice so quickly doesn't bode well for the stock as long as there is uncertainty about how long it will take for it to book some profits. And companies other than Tesla could be affected by its slump: This was the first American automaker to go public since Ford in 1956, and its stock offering was so widely watched that a strong post-offering performance could have given life to the IPO market in general. Needless to say, its post-IPO decline is likely to have the opposite effect.
Underwriters of IPOs have a few tactics in their repertoires to deliver a pop in a stock on its first day of trading -- pricing an offering just far enough below demand, for example. When used for a company with enough publicity, such as Tesla, those techniques can ignite enough momentum among small investors to lift the stock for a while, and even signal to investors that the IPO waters are safe. But in a down market, those tactics can backfire when the stock drops after that first surge.
Tesla's market performance is also being watched by other alternative-energy companies hungry for capital. Unlike software or Internet startups, cleantech companies often require a large amount of money up front to generate steady cash flows. If the Tesla IPO is viewed as a disappointment, it may make it harder for other cleantech startups to go public.
That in turn would be bad news for venture capitalists, who look to the public markets as a way to cash out of their investments. The more opportunities they see to make a profit on companies in their portfolios, they more willing they are to make new investments in promising startups.
Big Promise, but Big Deficits
Tesla is a strong mix of enticing promise and nagging concerns that will keep its stock price volatile for some time. The story is an appealing one: The Tesla Roadster, introduced two years ago, is a sexy all-electric sports car that can go from zero to 60 miles an hour in less than four seconds, produces no tailpipe emissions, and can run for 236 miles on a single charge. Tesla has sold more than 1,000 Roadsters. If electric cars catch on, Tesla could revive the U.S. auto industry.
That's the promise, now for the concerns. A Roadster costs more than $100,000, limiting their sales potential. Tesla's next planned vehicle, the Model S premium sedan, has an anticipated price tag of $49,900 -- again, not easily accessible to the masses, especially in a recession-scarred economy. Meanwhile, Tesla not only has an accumulated deficit of nearly $300 million, but its losses are growing. In the quarter that ended March 31, it posted a loss of $29 million on revenue of $21 million. A year earlier, it showed a loss of $16 million, against revenue of $21 million.
The concerns seem to be winning out for now in the minds of investors. Tesla's slump this week suggests that even a well-managed company with ambitious plans can't get a break unless it's signaling strong profits in the near future. But Tesla's promise isn't likely to bloom until the longer term.
Tesla is an example of an ideal IPO candidate -- a big idea that could pay off, but needing a lot of capital to get there. The problem is, this is a market obsessed with profits. Often that is a good thing, especially when it means filtering out companies that don't deserve to go public.
But Tesla is one that deserves a shot -- and a lot more patience that the market is offering it right now.
Investing in Startups
The lucrative and risky world of startups.View Course »