Tesla (TSLA) Enthusiasm Quickly Fades

Tesla Post-Open Slump

On its opening day, shares of Tesla Motors (NASDAQ: TSLA) soared despite broader market weakness.  Exactly one week later, Tesla could not catch a bid in a broad-based market rally that saw nearly every stock without major news close in the green.  Speaking of green, it was a particularly strong day for green stocks, a group of which Tesla is a part of.  First Solar (NASDAQ: FSLR) the leading stock in the solar sector closed sharply higher, up 5.42%.

Tesla's stock blasts off then slowly fades.

Will The Slump Hurt Greentech IPOs?

TechCrunch raised the question as to whether the lack of followup success beyond the IPO day/week for companies like Tesla and A123 (AONE) will provide a “Netscape Moment” for greentech, whereby the lack of trading success inhibits the ability and desire for other startups to pursue public offerings.  While I wasn’t enamored with the IPO of Tesla, I still think that the IPO is an incredibly important tool for young companies.  The cost of capital is far cheaper in pursuing an IPO than relying on venture capital and debt markets to fund growth.  The key distinction for me is investors need to ask “why is this company going public?”

Typically there are two reasons to IPO: 1) to raise money to fund growth, or 2) to cash out early investors.  With Tesla, there seems to be a little of both.  Reaching public markets is an important milestone and factor in achieving sustainability of growth and affords the opportunity for young companies to leverage their existing revenue streams into further gains.  Naturally, there should be an investment preference in companies who use their capital raises to fund longer term growth.  Early investors cashing out too aggressively is generally a sign to run the other way.

In their analysis on the implications of the Tesla IPO on greentech carmakers, Earth2Tech offered some interesting thoughts from Smith Electric Vehicles’ CEO, Bryan Hansel.  Hansel put it the prospect of an IPO particularly well in declaring that the company would seek a public offering only “If we see a number of markets opening up.”  Ultimately, Smith Electric wants to see that they do in fact have a revenue base, at which point they will pursue an IPO in order to leverage that revenue base into growth.  This is the recipe for success that other green IPOs need to follow.

When First Solar IPO’d, the company used the proceeds in order to build out its manufacturing capacity and to prepare itself for steadily increasing demand for their thin-film solar wafers.  This helped the company’s revenue growth take a parabolic trajectory in its early days as a public company.  Similarly to Tesla,  A123’s stock has slumped since it’s opening day; however, it remains above the initial pricing of the IPO.  More importantly, the company itself is using the proceeds of the IPO in order to better position themselves in two key markets for the company’s long-term success: electric car batteries and power grid storage of electricity.  Such investment in its growth bodes well for A123’s longer-term shareholders.

Essential for all of these young companies in young industries is to remain committed to their growth plans put in place prior to going public and not succumbing to the whims of quarterly earnings traders who rely far more on short-term fluctuations than long-term building.  While that may sound idealistic, and it’s certainly not easy to do, the companies who are performing the best in today’s stock market are those who have remained committed to a plan of producing and delivering the best products and services, rather than focusing on squeezing every once out of each quarter (see: Apple, Inc., and in the green space First Solar).

As always, there will be successes and there will be failures with IPOs, but by no means should companies shy away from the public offering when the option is available.

Should we Reconsider Tesla?

I was rather shocked to see investors so eager to scoop up shares of Tesla when the company faces a significant revenue gap this year and still has plenty of time before it potentially can turn profitable.  Anyone buying shares at this point should be well aware that the company is a risk/reward bet on a long term trend towards cleaner energy.  It is far too early to judge the success of this particular IPO.  One thing is clear, at these valuations, the risk/reward ratio is far more compelling to investors than it was just a week ago.

Despite the pullback in the stock’s price, I would still rather wait to see tangible successes from Tesla in translating their new capital into a sustainable long-term business.  As we start learning more about consumer sentiment towards the Model S, then there will be far more clarity as to whether this is a stock to own for the long-run.

Disclosure: Long AONE and FSLR

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