On June 29, 2010, shares of electric car maker Tesla Motors Inc. (TSLA), which was founded in 2003, increased more than 40% as investors bet that electric cars would define the future of the auto industry. It’s initial public offering (IPO) was impressive, considering the weakness and recent volatility in the broader stock markets. Tesla’s closing share price was $23.89 after opening at $17.00. The company’s market capitalization increased to $2.22 billion USD overnight, compared to its $1.6 billion USD market cap before the IPO. It was the first initial public offering by an American automaker since Ford’s debut in 1956. Their IPO comes at a time when interest in electric cars by the government and public is at an all time high, and major automakers are launching a range of battery powered and hybrid cars.
News articles quoted analyst Matt Therian (of Connecticut-based IPO research house Renaissance Capital) who described the general investor sentiment: “It’s probably too early to say that electric vehicles are definitely going to be the next thing in cars, but if they are I think the potential is huge.”
The potential for electric vehicles is indeed huge, considering that the US government is pushing aggressively towards this particular technology for automobiles. This is despite the issues associated with electricity supply/demand and the mass manufacturing of lithium batteries. It also comes in the face of the availability of another clean alternative technology, in hydrogen based fuel (which takes advantage of existing petrol station infrastructure) such as in the Honda FCX Clarity.
Its interesting to note, that the world has already decided that battery based electric vehicles is the direction that will be taken. Billions of dollars have already been spent at many levels of the auto industry, government, and pro-eco organizations, on manufacturing, R&D, advertising, public relation campaigns, etc. However, that does necessarily mean that Tesla or (Tesla’s stock) will benefit from the industry trend.
Investing in the latest or newest technologies is not necessarily bad or unprofitable. Things that are new and may have the potential to be transformational, is still not enough to be able to make a smart investment decision. Doing so would be gambling.
Tesla is not yet profitable and it does not expect to be profitable for at least two years. CEO Elon Musk says that the company is planning to expand with a sedan named the Model S. But the company still faces some tough competition in general, from the major auto maker’s traditional internal combustion engines as well as their eco-friendly alternatives (battery & hybrids).
However, its important to note that Tesla’s current roadster starting at $125,000 USD is priced to attract luxury buyers, not the average citizen. The Model S is expected to be available in 2012, with a starting base price of $49,000 USD (according to Tesla 6/18/2010). Many luxury based companies sell to affluent customers who purchase their products regardless of what happens in the economy, and their purchase decisions are often not based on the price.
Investor over-enthusiasm comes hand-in-hand with investing in technology company stocks. The once mighty Dell, Microsoft, IBM, Sun, Motorola, and Yahoo shares aren’t doing very well these days. Superstar tech company RIM, Research In Motion (RIMM) is now trading at around the $50 level on the NASDAQ, when a few months ago it was at the $77 level. Their most recent quarterly earnings were pretty good, but it still managed to disappoint the market.
In 2001, I made a university study on VoIP. After completing the study I was certain that the technology and associated industry profit was going to be huge. I searched for companies that were going to bring the technology to market. One name popped up, Vonage (VG), the voice over IP (VoIP) communications company. The company was in operation since 2001, and eventually went public on May 24, 2006. Its debut share price was also $17.00 per share (I wonder if there was a psychological pricing component that went into that decision), and then dropped 23.5% to close at $13.00 the following day. By that time, even local Canadian communication companies (slowest of G8 nations to provide newer consumer telecommunication services) such as Rogers were providing VoIP services.
Interestingly, Tesla’s closing price today (7/13/2010) was $18.14, about 6.7% above their $17.00 IPO list price. I’m not sure if Tesla Motors is going to become a huge profit making machine. But it will be interesting to see investors’ reactions a few years down the road, as other luxury car owners are not exactly awash in cash these days.
So what does the wise Warren Buffett have to say about investing in new and exciting industries?
“In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding. Therefore if we can clearly see significant growth ahead for an industry, it does not mean that we can judge what its profit margins and returns on capital will be, as competitors battle for market share. We will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, it is easy to make plenty of mistakes.”
I always like to look at stock investments as a businessman, to give a different perspective. At its $23.89 IPO day price, the investors in Tesla suggested that the business was worth $2.2 billion. As a businessman, if Tesla was private, and I had $2.2 billion to buy out the entire company, I wouldn’t. The business uncertainties involved would simply make the purchase too risky. Thats not to say that others who are more familiar with the auto industry wouldn’t make such a purchase, but each investor has their own safety gauges and investment preferences. When investing in stocks, its always a good question to ask yourself “if the company was a private business, and you had the means to, would you buy it?” If you hesitate, that probably means more questions need to be answered before making any investment.
It’ll be interesting to see what happens to Tesla in the next few years.
Thanks & Happy Investing! — The Investment Blogger © 2010