Another Uh-Oh IPO

It sure didn't take long for Tesla Motors (Nasdaq: TSLA  ) to shift into reverse.

The electric-car maker that dazzled the market with its IPO last week is now officially a busted IPO after closing below its initial price yesterday. It headed even lower this morning.

There certainly was plenty of buzz behind the Wall Street debut of the company behind stylish but pricy zero-emission cars. Tesla bumped up the number of shares it was offering and priced its freshly minted shares at $17 apiece, comfortably ahead of the original $14 to $16 range.

The mania was just getting started. The stock closed 40% higher on its first trading day, briefly breaking through $30 at one point the following day. It was a gravity-defying feat for Tesla, since the market was tanking at the time.

Shares have been rolling downhill ever since.

Sadly, Tesla isn't the only IPO to come blazing out of the gate like a rodeo bull, only to be mauled by the bear.

Hot starts cool off quickly
The IPO pipeline isn't exactly gushing these days, especially after the market rally that began in March of last year came to a screeching springtime halt.

Many companies have had to postpone their debutante balls or send underwriters packing for keeps. The limited supply of fresh meat has helped spark interest in some of the new names, but it's been hard for the one-day wonders to live up to their rocking initial impressions.

Let's go over five of this year's IPOs with the healthiest opening-day gains. See if you can spot the gruesomely obvious trend. 

Company

IPO

1st Day Close

7/6/10

Financial Engines (Nasdaq: FNGN  )

$12.00

$17.25

$12.56

MaxLinear (NYSE: MXL  )

$14.00

$18.70

$13.26

Meru Networks

$15.00

$19.17

$11.02

Calix (NYSE: CALX  )

$13.00

$15.10

$10.87

ReachLocal (Nasdaq: RLOC  )

$13.00

$14.98

$12.27

Source: Hoover's IPO Central, Yahoo! Finance.

Shares of retirement planning specialist Financial Engines lead the pack with their 44% surge on its first trading day. They have gone on to give back nearly all of those gains.

It gets even uglier after that. The other four stocks -- recipients of opening-day gains between 15% and 34% -- have gone on to give all of those upticks back.

And then some.

They join Tesla Motors as "busted" IPOs, a name given to new stock offerings that break below what their first public investors paid for them.

Fixing the broken
No one is happy when IPOs go underwater. Underwriters look greedy. Their choice clients that seemed so grateful to get in on the offerings grow ungrateful.

However, if we're talking about quality companies with fundamentals intact, busted debutantes can turn into lucrative investing opportunities.

Webhosting giant Rackspace (NYSE: RAX  ) went public two summers ago. It had to settle for a $12.50 price after its initial pricing range had the shares fetching as much as $16 apiece. Even the $12.50 starting line proved to be overly optimistic. Rackspace opened at $10 and went on to meander in the single digits for months. It bottomed out at a mere $4 last February. It now trades comfortably in the high teens.  

I dissed Tesla Motors last week, just as its stock was peaking. I felt the mania was overdone for an unproven company that is likely still years away from profitability. I wasn't alone.

However, I also took advantage of this morning's bust to put in an outperform rating on the stock in the Motley Fool CAPS rating service. I still think it's a lottery ticket, but now that it's trading for roughly half of last week's peak, it's a considerably cheaper lottery ticket.

The challenges are real for Tesla. It will need to be successful with its more accessibly priced sedan in two years. It will also have to stand out from a market that is quickly ramping up the production of fuel-efficient hybrids and electric cars.

However, there is some degree of comfort in buying into a story stock where the potential long-term promise is still largely intact. Paying less than what a chagrined underwriter's best accounts had to fork over is just a showroom steal.

Can Tesla Motors get cheap enough for you, or is it headed to zero? Share your thoughts in the comments box below.

Rackspace Hosting is a Motley Fool Rule Breakers pick. Try any of our Foolish newsletters today, free for 30 days

Longtime Fool contributor Rick Munarriz is waiting for IPOs to stick to their gains. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 07, 2010, at 6:33 PM, wackywebname wrote:

    Tesla seems to have a great team. They have succeeded (at least preliminarily) where no one else has. They have a vision well aligned with trends and a good record of execution. I think it's an interesting proposition with a market cap of ~$150MM.

  • Report this Comment On July 07, 2010, at 8:11 PM, HDTVBG wrote:

    In real life, it was easy to make money on the TSLA IPO, subscribing at the $17 price and dumping out a day or two later close to $30. Now it will drift all the way down to the single digits and languish for two years. Here on Motley Fool, with the STUPID 7 day minimum hold rule, getting in on the TSLA IPO was a points death sentence thrill ride - 100 free points in the first day due to a programmer error, but even after the Fools fixed it we pioneers were up a tidy 50 points or so when I was ready to pull the trigger and take profits. Sadly, we were trapped like rats until that 7th day odometer granted permission to end the position with negative points. At least we made MONEY, eh?

  • Report this Comment On July 07, 2010, at 10:52 PM, memoandstitch wrote:

    How come TMF displays RLOC at $0.00?

  • Report this Comment On July 10, 2010, at 3:20 AM, lowmaple wrote:

    just because the stock price is lower than the IPO does not mean it is a deal

  • Report this Comment On July 17, 2010, at 1:52 AM, auberon512 wrote:

    Tesla makes $100K toys. Not many people in the market for those.

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