The Tesla IPO - Irony and History in motion
The original Tesla, Mr. Tesla himself, was a brilliant scientist who was a founding father in the study and use of electricity.
He was also chased after impossible pipe dreams, made it damn near impossible to tell his truths form his lies, his brilliant revolutionary theories based in fact from his wishes based on dreams.
What lives on from Tesla is not a behemoth of industry such as conEdison. No, what lives on from Tesla are a string of brilliant ideas, a fundamental way in which the world works, but a feeling that he was always looking forward too far, to something always not quite there, and that he knew he would not be able to actually achieve. To this day, Telsa, a genius, a scoundrel, a brilliant inventor, has an air about him of wishes and dreams, what could have been but never was.
And today, Tesla, the motor company, is going cap-in-hand to investors, trying to sell itself through an IPO. Recognizing the fact that the company is broke, the founder is broke, the company has had only one quarter of profit (and that was a stretch accounting wise), and the company since its inception has lost a few hundred million and is living off an idiotic loan from Obama at the cost of taxpayers - the IPO is not quite the usual fare.
You see, from the start, Tesla has been all about the technology. It was started in Silicon Valley, its early investors were all tech investors (including the founders of Google, among others). Though it has sold only 1,000 cars, it has been in the news incessantly. Though the next generation car has yet to be built, hell there is not even a rolling testbed, many people know and have heard of the Tesla Model S - our President has even mentioned it. And yet here is a company claiming that though it has only built and sold 1,000 cars, in 5 years it will sell 20,000 a year. That though it currently has 50 dealers and no one knows how to service the cars, they will be adopted with open arms by consumers. Though in a 30mpg family sedan (hell even the 305hp 2011 Mustang gets 30mpg) 100,000 miles only costs $11,667 at $3.50/gl gasoline - Tesla expects a massive pent up demand for an electric sedan which costs $25,000 more than its competitors.
In other words, what Tesla is selling, just like the original Tesla, is a dream. A beautiful dream to be sure. The difference is that Nikolai Tesla once tore up a contract which could have made him the first world's first billionaire, because it might have bankrupted Westinghouse and quashed Tesla's dreams of free energy for all: he let Westinghouse and eventually the world use his AC current and AC motor free of royalties. Tesla Motors has already traded away its technology, for some cash from Mercedes and an old factory from Toyota. I am not sure there is much more left in it.
Last December, when valuing internal stock options, the company priced them at $6.63. In March they were $9.96. Now the company is trying for an IPO at $15, which would value the company at $1.5 billion. But it has only sold 1,063 cars, has lost $150 million to date, and wont have a new model to sell until about 2013, at best. In addition, Mercedes, Lexus, Audi, Renault, Mitsubishi, Volkswagen, Subaru, Nissan, Ford and GM are all planning or already selling (in the case of Nissan) all-electric vehicles or hybrids that can run purely on electric power such as the Chevy Volt.
In other words - the hottest thing about this stock will probably be the cost to borrow it in order to short the hell out of it (bet against it in the stock market).
This is from an investor who was invited to the IPO roadshow:
"I went to the IPO roadshow for potential institutional investors yesterday in San Francisco," he says. "They were hand-picked technology types. The investment bankers (the IPO is underwritten by Goldman Sachs, Morgan Stanley, JP Morgan and Deutche Bank) are clearly aiming this IPO at the tech/Silicon Valley investor crowd, not at industrial investors, who would have laughed them out of the room. For that matter, the Tesla types are not car guys, either. They spent the time pounding their chests about [their] Sili Valley pedigrees. I doubt anyone there knew the difference between oversteer and understeer."
The targeting of tech investors seems overtly cynical, but given the insular nature of investing and the possibility of competitive concerns from industrial investors, it's probably a shrewd move. When discussing the actual viability of Tesla as a more mainstream manufacturer, rather than a boutique builder, things get interesting. The 258-page company prospectus features 42 pages of risks, risks associated with everything from Tesla's relative car-building inexperience to the public's perception of electric cars.
Our attendee: "Someone in the room asked about availability of service, given lack of dealerships. Blank look on Elon's face: 'Well, these cars don't really need service,' he said. 'You don't need, you know, oil changes and things.'" This is, of course, most concerning from a support and repair perspective. The company plans to have just 50 Tesla dealers worldwide by the time of the 2012 Tesla Model S launch — a vehicle that it hopes to sell some 20,000 examples of per year. Even without oil changes, the limited number of locations will mean trouble for regularly scheduled maintenance. Not only is the dismissal of regular maintenance items troublesome, but specialized service will likely be required for the high-powered controllers and battery packs.
As far as production plans are concerned, the company will be bringing everything in house, utilizing the the former NUMMI facility in California, the facility that Toyota essentially traded for an equity stake and subsystem/expertise sharing. "Most of the NUMMI factory will be empty," our insider says. "[Tesla plans to use] only a small portion of the floorplan, with the remainder reserved for future production and upgrades." There was some discussion of production plans, but it sounded like a Silicon Valley production mentality: Build a fab[rication shop], build pilot production at a loss, but expect production costs to fall dramatically as volumes increase and manufacturing expertise improves. That would sound ludicrous to industrial investors, but it makes perfect sense to Sili Valley types. (Think Apple iPhone v4, hard drives the size of a fingernail, etc.)"
Here's the kicker: If the plan to lose cash on the outset and make up the difference in volume and cost savings sounds familiar, it should — it's one of the practices that led to Detroit automakers losing money hand over fist and turning out lackluster products for decades. According to our insider, "they want to sell 20,000 units a year of the S Model (sic) at about $58,000 each, although fully optioned cars could boost that by as much as 50%. Break-even is said to be 12,500 units." Even considering the supposed pent-up demand among environmentalists for a car like the Model S, those are ambitious goals for a small company planning to launch a niche luxury product into a soft market.
Frankly, we're skeptical. We've seen how brutal and unforgiving the market can be, and other automakers aren't simply going to roll over and surrender that volume to Tesla. Nissan is leading the way with its bargain-priced Leaf, and the Chevy Volt, although a different breed of vehicle, will compete almost directly with the Model S at half the price. It may be that their plans are very carefully arranged and well thought-out, but that doesn't come through in the presentation.
If Tesla and Musk can pull their plans off, they'll have established the first new and major independent American automaker in a half century, and that's something to root for. But they're going to have to do a better job of convincing us that they're up to the task."
For even more reading - check out this WSJ article:
http://online.wsj.com/article/SB10001424052748704009804575309142582894892.html
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