Tesla Motors, the electric car maker that raised $226 million in an IPO this week and saw its shares leap 40.5 percent in the first day of trading, is coming back down to earth on its third day as a public company. The company’s shares shed more than 8 percent Thursday to close at $21.90. Is this the beginning of a trajectory for Tesla’s stock that will echo battery maker A123 Systems’ slide from levels above, $20 after going public in September, to around $9 today?
As Oliver Hazimeh, director of PRTM Management Consultants told me leading up to Tesla’s IPO, A123’s stock may offer “the closest proxy for an automotive EV stock offering,” as A123 has hitched its business to the nascent electric vehicle market.
We can’t predict, of course, how the market will value Tesla’s and A123’s shares. What we can do is examine some of the similarities and differences between the two companies in terms of relevant indicators for the market and examples of how investors have responded to these ventures so far.
A123’s $371 million IPO was the largest of 2009, representing about a third of the overall IPO market that year in terms of dollars raised. On the first day of trading (September 24), the company’s shares opened at a 25.9 percent premium over the offer price of $13.50, already well above the initially proposed price range of between $8 and $9.50 per share. A123’s shares zoomed up 50.3 percent during that session to close at $20.29 on a day when four other companies delivered less successful IPOs.
Tesla, meanwhile, priced its shares at $17 apiece, higher than the originally estimated range of $14 to $16 per share, then proceeded to open trading on Tuesday at $19 per share. The company had increased the number of shares in the offering by 20 percent on Monday, a sign of strong investor interest, and Tesla’s shares initially soared this week amid tumbling markets.
Closing the Gap
A hot IPO, however, can leave a stock poised for correction. Goldman, a lead underwriter on both Tesla and A123’s IPOs, raised the point earlier this year that all the attention A123Systems attracted in the IPO may have left it overpriced in the first few months that followed. Kaufman Brothers analyst Theodore O’Neill saw a better bargain in Ener1, whose subsidiaries include battery maker EnerDel. Both A123 and Ener1 had lined up automotive and mass transit partners, were pursuing consumer electronics, automotive and frequency regulation markets and, by First Call’s estimates, were on track to report approximately $300 million in revenue in 2011.
Yet A123 was trading in January 2010 at six times its estimated sales for 2011, compared to Ener1 trading at just double its estimated 2011 sales. That disparity between the two companies, O’Neill wrote at the time, appeared to be “unsustainable,” and indeed the gap had begun to close by May of this year.
Both A123 and Tesla have one major backer in common: the U.S. government. A123 secured a whopping $249 million grant from the Department of Energy last summer, and Tesla scored a long-awaited conditional commitment for $465 million in direct loans from the DOE in June 2009.
This level of support from Uncle Sam may stoke investors’ confidence initially, but may not sustain Tesla’s stock long term as the company works to get into the black. J.D. Power and Associates Powertrain Analyst Mike Omotoso posited recently that the DOE award, combined with planned investment from Toyota, “made investors see Tesla as a safe play,” adding that, “The feeling may be that the federal and some state governments have so much invested in the EV market at this point that they’ll do whatever they can to help Tesla and other EV companies succeed.”
Both Tesla and A123 remain small fish in big ponds. A123 will be going up against giants like Johnson Controls-Saft, Panasonic, LG Chem and Samsung. The company faces tough competition from firms that, as A123 noted in its 2009 earnings report, often boast “greater market presence, longer operating histories, stronger name recognition, larger customer bases and significantly greater financial, technical, sales and marketing, manufacturing and other resources.” In addition, A123 anticipates that in the grid storage market in particular, it may encounter competition from developers of new technologies.
Tesla, meanwhile, has so far been a niche player, virtually unchallenged in the market for high-performance luxury electric cars. But the company will face competition from many of the world’s largest automakers by the time it launches its Model S, a mid-range electric sedan that is the key to Tesla’s profitability.
Both Tesla and A123 have committed, as part of their agreements with the DOE, to undertake major expansions over the next few years. Under the battery grant initiative, A123 will have spend up to $1 of it own funds for every incentive dollar it receives. Under the Advanced Technology Vehicles Manufacturing program that’s providing Tesla’s loans, the government loans can cover only 80 percent of project costs.
This leaves both companies poised for massive spending that involves more than a little risk, given that they’re readying factories to supply the unproven market for electric vehicles. Analyst John Gartner of Pike Research told us earlier this year that A123Systems and other U.S. battery developers planning to build out new plants in the next few years, “are not sitting on a lot of cash.” As a result, “Once they establish that manufacturing, they need to be instantly generating revenue.” In the meantime, they need patient investors willing to wait a few years.
History of Losses
So far, A123 and Tesla have each racked up significant losses, never turned a profit and they expect to continue losing money for some time to come. But while A123’s revenue is on the rise (increasingly from sales to the transportation sector and electric grid market) Tesla’s revenues are set to hit a drought, as the company plans to stop selling the stylish-but-expensive Roadster in 2011. It does not plan to introduce the next-gen model until at least one year after Model S production begins.
The reality of these companies, Tesla and A123 alike, is that they’re young and racing to catch what could be a massive wave if the electric vehicle market takes off. It seems only reasonable for their stocks to come down and hover well below their hot IPOs during the years while they’re trying to build a business (although Wall Street, of course, often operates on many factors other than reason). Where things will get really interesting is in 2012 and beyond, when both companies are slated to be on their marks, set and ready to go in terms of manufacturing in higher volumes. If they build it, will more customers and investors come? We’ll have to wait and see.
Photo courtesy of Tesla Motors
For more research on cleantech financing check out GigaOM Pro (subscription required):