Tesla Motors (NASDAQ:TSLA) went public at $17 per share more than a year ago, jumping out of the box quickly with a 40.8% first-day return. Since then, it has lost 8.1%. It’s the usual IPO story: out with a bang, in with a whimper. As of the Aug. 22 close, Tesla sits less than $5 above its IPO price.
A wise man once said you could expect the average IPO to be trading below its IPO price within one or two years of going public. Tesla is right on schedule. Its cars might be sexy, but its stock is not. Sell now.
Two Rules
When investing in IPOs, I can think of two rules that will save you a lot of money and grief. The first is simple: Make sure the company is making money and has been for some time. Otherwise, you’re a venture capitalist. Second: You want the company to receive most of the proceeds from the IPO, not existing shareholders. It always can do a secondary offering after the lock-up period — usually six months — ends.
Tesla failed on the first part, which makes the second part irrelevant. The IPO prospectus, for those who took the time to read it, revealed a laundry list of investors — men and women with much deeper pockets than most of us — able to hold its stock for several years. You probably wouldn’t buy Ford (NYSE:F) or General Motors (NYSE:GM) stock while they are losing money, yet you’re willing to do so with an unproven commodity. Wait a few years until it has proven its business model works.
Car Manufacturing
You don’t have to be a rocket scientist to know that manufacturing cars is expensive. The near-death experiences of both Chrysler and GM should be warning enough for would be car manufacturers to stay away. But like a bright light at night attracting bugs, companies such as Tesla seem oblivious to risk.
In early August, Tesla announced it was hiring four vice presidents to help with the development of its Model S sedan, which it expects will reach showrooms in mid-2012. In preparation for its launch, it will cease production of the Roadster in December, leaving a six-month gap in revenue generation. Filling some of that gap is its $100 million deal with Toyota (NYSE:TM) to supply battery packs and motors for the electric version of the RAV4. There’s a rumor it’s chasing a $1 billion deal.
If that happens, I really have to wonder why it would bother producing the Model S, which will only have a maximum annual production of 20,000 vehicles. Chrysler/Fiat CEO Sergio Marchionne believes it needs to produce 6 million cars annually to be a player in the global car market.
Furthermore, vehicles like the Cadillac ELR provide consumers with a less costly and far more sensible choice. If Tesla doesn’t sign this mystery billion-dollar deal, it’s only a matter of time before the cash flow comes to a grinding halt.
Bottom Line
You can buy Ford or GM stock right now at less than one times sales. Both are making money (although we can debate for how long), while Tesla is deep in the hole with no apparent time frame for moving into the black. For this privilege, you get to pay seven times sales. The Model S might be a very nice-looking car, but it’s not the solution to Tesla’s problem. No, the solution is finding a better way to store electricity. Until this happens, all you really get is a pipe dream — and an expensive one at that.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
