Tesla Motors, the Silicon Valley electric car startup gunning to raise $185 million next week through an IPO and sales of shares to Toyota, has won over members of the Silicon Valley, Capitol Hill and Hollywood elite. But will the company, which has never turned a profit, charge up Wall Street with a blockbuster IPO?
A dive into Tesla’s filings with financial regulators reveals a company with years of losses behind it and a long, uncertain road to profitability still ahead. But a handful of elements could help buoy the price at which Tesla’s shares start trading. First, there’s the curb appeal of a high-end, high-tech green brand born in Silicon Valley. CEO Elon Musk emphasized Tesla’s competitive strength as a tech innovator in his “road show” pitch to potential investors, saying, “We’re a friggin’ technology Velociraptor.”
Then there are the votes of confidence from a pair of heavyweights: Daimler, an investor and low-volume powertrain customer (Musk compared the deal to “Gutenberg coming and saying, hey, can you make a press for me?”), and the Obama administration, which has awarded the company $465 million in direct low-interest loans, subject to certain benchmarks.
In addition, Tesla could benefit from the impression that it’s cozy and getting cozier with hybrid leader Toyota, which has agreed to invest $50 million in a private placement of Tesla stock immediately following the startup’s IPO.
According to Mike Omotoso, senior manager for J.D. Power and Associates’ Global Powertrain division, a best-case scenario for Tesla would be if next week’s offering is “oversubscribed, prices rise, the company is valued at $250 million or more, and the Toyota deal goes ahead.”
The company would then have the “money to buy the NUMMI plant, build the Model S, maybe build a sister vehicle for Toyota — and Elon Musk gets to keep his head above water,” Omotoso said, adding that a successful IPO could also help Tesla, “sell the Roadster for a couple more years and maybe create an early buzz for the Model S.”
Pike Research Senior Analyst Dave Hurst commented that it would be “feasible” for Tesla to raise at least $178 million in its IPO and for the company’s stock to hit more than $16-$17 per share. In short, said Hurst, Tesla is “sexy,” with a very public profile in a growing market with big name backers, “so it would make sense that investors would jump on board with one of the ‘original’ companies in this sector.”
According to Omotoso, a worst-case scenario for Tesla’s IPO would be if the offering is “undersubscribed, prices drop, and the Toyota deal is a bust.” That would leave Tesla without the money needed to buy the NUMMI plant and build the Model S. With Roadster production slated to halt in 2012 until a year after the launch of the Model S, Omotoso said, “Tesla would basically be gone in a couple of years.”
Oliver Hazimeh, director of PRTM Management Consultants, told me that despite growing momentum for the electric vehicle market in general and Tesla’s advantage as an early mover in its high end, he’s skeptical that the startup will be able to grow into a mass-market brand in the near term. Rather, he anticipates that the company will remain “limited to niche applications which will really put a cap on future cash-flows and long term stock growth potential.”
Meanwhile, Lux Research analyst Jacob Grose warned in a briefing this week about Tesla’s latest S-1 amendment that given factors including the “tenuous” nature of the startup’s relationship with Toyota, and its more than $290 million in accumulated net losses, “[i]nterested investors should take note of the substantial risks involved in this would-be electric vehicle powerhouse.”
Part of the challenge, said Hazimeh, is that expanding beyond its current role as a niche car maker will require Tesla to expand its portfolio to include mid-priced vehicles, and go head-to-head with established manufacturers.
Tesla aims to tackle that challenge: Musk has long discussed plans for a lower-cost model after the Model S, and the company’s S-1 says future models “may include, as examples, a crossover/sport utility vehicle, van or a cabriolet” (Musk’s “road show” pitch to potential investors includes rough renderings of these concepts). But uncertainty about the startup’s ability to successfully expand its lineup could drag down Tesla’s IPO.
Or Middle of the Road?
Of course, Tesla’s IPO may ultimately mark neither a wild success nor financial flop, but a more middling event that helps the company raise some needed capital. Hurst said he suspects that Tesla “will likely raise the money they need to complete the deal with Toyota, but then their stock will languish as profitability remains elusive for several years without some shift in strategy.” Omotoso anticipates the offering will come in “somewhere between boom and bust, but a little closer to the downside due to the still shaky financial markets,” noting that “several IPOs have been canceled recently across multiple industries.”
Solar company Solyndra, for example, which had been aiming to raise as much as $300 million through an IPO, said last week that it has opted to raise $175 million from existing investors instead. Solyndra, which makes tube-shaped solar panels and has won support from the Department of Energy, cited “going uncertainties in the public capital markets” for pulling its IPO.
Other greentech companies that have withdrawn IPO plans in recent months include geothermal developer Nobao Renewable Energy and amorphous-silicon solar panel maker Trony Solar. But while other companies have downsized or canceled IPOs in recent months, Tesla made a characteristically aggressive move last week to boost expectations for its offering.
At the $15-per-share midpoint of the price range that Tesla has said it now expects, the company would garner a $1.4 billion valuation. That’s significantly more than the $550 million valuation at which Daimler took a stake in Tesla in May 2009.
The $14-$16 per share price range that Tesla has proposed also marks a major uptick from December 2009, when it reportedly estimated the fair price of shares awarded to company insiders at $6.63 apiece. Regulatory filings show that as recently as March of this year Tesla put the fair price at $9.96 per share.
As to how its shares will perform once they start trading, according to Hazimeh, battery maker A123 Systems’ IPO and ensuing performance offers “a potentially relevant data point.” A123, which like Tesla has yet to turn a profit, went public in September 2009, and has since seen its stock slide from a level above $20 to below $9 today (within the initially proposed price range of between $8 and $9.50 a share).
“In batteries,” Hazimeh explained, “investors quickly realized that profits and growth are tightly linked to ability to scale up and drive cost down.” Electric car startups like Tesla, as well as earlier-stage ventures such as Fisker Automotive and Coda Automotive, will face a similar challenge.
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