You want a green technology play? At least on the surface, it won't get much greener than electric-car maker Tesla's upcoming IPO.
Tesla is in many ways an appealing company. Against tremendous odds, they designed, built, and brought an electric car to market -- a good one, one that car enthusiasts, greentech enthusiasts, and people who just like sexy roadsters can all embrace.
But now they want to expand their model line to create more -- and more affordable -- models.
How do you make a small fortune in the car business?
You start with a large one, goes the old joke.
Making money in the auto business, with its cutthroat competition and razor-thin margins, is hard enough for global industrial giants like Ford (NYSE:F) and Toyota (NYSE:TM), as recent events have shown. Because of the massive fixed costs and long development times involved, startup car companies have historically been the longest of long shots, and the successful ones have focused on tiny, expensive niches -- until very recently, the last from-scratch automotive startup to achieve something like enduring global status was Lamborghini -- in 1963.
"But Tesla's a game-changing technology company, not a Ferrari wannabe," you say. "It's better compared to where tech companies like Amazon.com (NASDAQ:AMZN) or Akamai (NASDAQ:AKAM) were when they went public, not smokestack auto companies."
Well, that's an instructive example, too.
Is Tesla a tech growth story waiting to happen?
Could Tesla be a Rule Breaker like Amazon was -- a company that achieves rapid growth while disrupting the existing order in its market space?
I think it's unlikely. Why? Because the barriers to entry are immense.
Look, Tesla got everyone's attention with its first model, the Roadster, because it was the first electric car that was, well, sexy. It looks great, it's fun to drive, it's fast, and it has the range to work as a real car. As a hip, green alternative to a Porsche or a Corvette, it's a great proposition. While the company has yet to make a profit, the Roadster is a successful niche car that has established Tesla, against tremendous odds, as a credible manufacturer of electric cars worth buying.
But the Roadster, which is based on the underpinnings of U.K. sports-car maker Lotus' Elise, and which is built in part by Lotus -- is going away after 2011 because of "planned tooling changes" at Lotus. In other words, Lotus is substantially changing the Roadster's cousin, and that's what this IPO is about: Tesla needs to raise money to develop its own "platform" -- industry-speak for a vehicle architecture that can be shared among several models -- so that it isn't dependent on other companies' product decisions going forward.
The first car to be built on this new platform is the upcoming Model S, a four-door luxury sedan to be priced around $50,000 (after the $7,500 rebate, of course). As Tesla themselves put it in their SEC filing:
We are designing the Model S to have an adaptable platform architecture and common electric powertrain in order to allow us to efficiently create other electric vehicles, which may include a sport utility vehicle, commercial van or a coupe. By developing our future vehicles from this common platform, we believe we can reduce their development time, and therefore reduce the required additional capital investment. Our long-term goal is to offer consumers a full range of electric vehicles, including a product line at a lower price point than the planned Model S.
"… a lower price point than the planned Model S." In other words, they want to go from being a tiny, niche, alt-sports-car maker offering a trendy Porsche alternative to a company that goes head to head with mass market manufacturers: Toyota, General Motors, Ford, Honda (NYSE:HMC), and Volkswagen, all of which have vast engineering resources, global distribution networks, worldwide brand recognition, and -- pay attention here -- electric vehicle programs of their own already well under way.
Do you see why I'm skeptical?
Tesla took the basic underpinnings from an acclaimed Lotus sports car, reworked it with an excellent, homebrewed electric powertrain and a novel transmission from BorgWarner (NYSE:BWA), and sold a handful at a six-figure price point -- about twice what Lotus gets for its cousin. Given the enormous developmental and regulatory hurdles that have to be overcome to bring a new car to market in the U.S., that's an enormous achievement. And I don't mean to downplay it. But it's a huge leap from there to going head to head with companies that have engineering resources and economies of scale that absolutely dwarf anything Tesla is likely to achieve in the next few years.
I could be wrong, but right now I don't think they can do it.
So what's the likely outcome?
Tesla is an intriguing company that has already had a big achievement against long odds. But they've never made money, they don't expect to make money for years to come, and their business plan takes them out of the niche where they've had success and puts them in direct competition with the major auto superpowers.
Put like that, buying Tesla's stock sounds kinda nuts, doesn't it?
Apparently, it didn't sound nuts to Daimler (NYSE:DAI), the maker of Mercedes-Benz and Smart cars, which bought a stake in Tesla last year. That investment came with conditions -- one of which is that Daimler gets first right of refusal if any other automaker tries to buy Tesla.
That's obviously the most likely exit strategy. How likely is it?
I don't know. I like Tesla and I want to see them succeed. But as far as I can tell right now, a buyout by Daimler at a premium is the best chance Tesla's future stockholders will have of a big payday.
