Tesla Motors IPO a win, but road ahead is bumpy
The Tesla Motors IPO sold out quickly, and shares of the company rose 41 percent in their first day of trading. But Tesla's ability to navigate the still-developing electric car market will be tested in the coming months.
Excitement over the auspicious response to Tesla Motors Inc.’s initial public stock offering Monday – a signal analysts applaud as a major plus for the wider automotive world in a down market – is being tempered by longer-term views of the company’s challenges in the still-developing market of alternative vehicles.
Tesla priced its IPO at $17 a share, above the expected range of $14 to $16, and had to sell 20 percent more shares than originally planned to meet the demands of investors. The Palo Alto, Calif.-based company was founded in 2003 and introduced its first electric car, the $109,000 Roadster in 2008, but has sold just 1,100 of the cars worldwide and has yet to make a profit.
“The reponse to Tesla’s IPO is very exciting news for the car industry, especially General Motors and taxpayers plans for bringing that company back public again,” says Andre Zdanow, chief market strategist at Charles Vista, LLC, an investment banking firm. GM is set to issue an IPO in mid-November.
“To see an auto maker of any kind go public and do this well in this down market should get many people excited about other carmakers doing well,” says Mr. Zdanow.
But Tesla faces an uphill battle for several reasons, he says.
One is the higher share price. Trading as "TSLA" on the NASDAQ, Tesla opened at $19 a share, 12 percent above its IPO, and climbed all the way to $25 before closing at $23.89 – a 41 percent increase. Higher stock prices make it more difficult for current and new investors to make money, Zdanow says, and demand for electric, hybrid and alternative fuel vehicles is also a question mark.
“Tesla has done a great job of creating excitement over new technology and has pushed other companies to become more aggressive in pursuit of that technology,” says Brett Smith, co-director of Manufacturing, Engineering & Technology for the Center for Automotive Research. “The challenge for everyone to understand is that electric vehicles are not a tomorrow solution. There is a lot of development needed over the next 10-20 years.”
Proceeds from the IPO will begin funding Tesla’s new vehicle, the Model S sedan, which the company claims will accelerate from zero to 60 mph in 5.6 seconds and will go 160 to 300 miles on a single charge, depending on the model. It is expected to sell for $57,500.
Surviving the next few years is key, Smith says. “They’ve never made a profit and some people have called [the company] a cash sinkhole … so the question is will they have enough money to make it through the next several years without making a profit?”
The number of other companies making electric cars, public acceptance of the prices and models offered, and the need for electric recharging infrastructure from homes to businesses to highways are all factors that could affect Tesla's success.
One bright spot for the electric and alternative vehicles industry came Monday, when California lawmakers reached a key compromise on a popular carpool lane exemption program. Under the plan, owners of electric and alternative fuel vehicles could buy stickers that allow them to use California’s carpool lanes without another occupant in the car through 2015. On the state's crowded freeways, carpool lanes can drastically cut travel times.
An existing program for hybrid vehicles, begun in 2005, quickly reached its 75,000 vehicle limit, and another 10,000 cars were allowed in. The hybrid car exemption plan is set to expire next year.
Some analysts say the new program – not yet approved by the state Senate – will boost sales of electric vehicles, but others argue the expiration of the old program could create a backlash. And consumers will be asking other questions before they buy, says Andy Kinard, president of Car Charging Group, a clean vehicle firm.
“Most importantly, when will the cars really be available in large numbers? What will they cost? What will be the Federal and State incentives at that time? What is the actual, useable range?” asks Mr. Kinard.
“I don’t think people will see access to the carpool lane as a good reason to spend 60 grand on a car,” he says.
Nevertheless, many analysts say the era of the electric car is near.
“Tesla’s IPO is a clear indicator that the electric vehicle market is changing the transportation sector and reinforces [the] view that we are headed even closer toward an electrification tipping point,” says Oliver Hazimeh, director and head of Global E-Mobility Practice at management consulting firm PRTM. He estimates market adoption of electric vehicles at 10 percent by 2020.
“As the industry transforms, technology and business model innovation must take place... [Tesla's] IPO reflects the excitement about the EV market and the growing desire to find more environmentally friendly transportation options.”