Not just anything can ride markets like Tesla

June 29, 2010

Tesla has sped off with a rare prize: a stock market hit. That must embolden General Motors, not to mention other non-auto companies, to push ahead with their own initial public offerings. The unprofitable electric sportscar maker isn’t expected to earn a dime until at least 2012. So if it can ride the markets so successfully, surely it’s a sign that investors are more receptive to new share sales after a turbulent six months.

After all, more U.S. IPOs have been pulled than have launched this year — by a 71 to 68 count. Of the ones that have come to market, 20 priced below the mooted range and 40 now trade lower than their IPO price, according to Thomson Reuters data. Yet Tesla has achieved a trifecta of new-issue achievements: increasing the number of shares sold, by a fifth; being one of just six to price above its range; and the stock surging on its first day of trading, by 40 percent — a feat even more impressive given the day’s broad market sell-off.

Wannabe public company executives should curb their enthusiasm, however. Tesla makes cars but it’s actually more of a technology play — more of its new shareholders are tech or alternative energy specialists than industrial-sector investors. GM can’t replicate that. Also, electric cars are likely to be a growth business, and, here, Tesla is an industry leader. Its cars achieve more miles per charge than most rivals. Daimler, for one, buys the batteries for some of its vehicles from Tesla — and also owns a small stake.

Tesla has its risks. The company faces a production hiatus when one of its major suppliers retools its factory. And Tesla already cautioned earlier in the year that the IPO proceeds would allow it to stay afloat only for a couple of years. If it doesn’t turn a profit by 2012, as planned, investors will either lose some or all of their money — or need to stump up more cash.

But for investors seeking the next big thing, Tesla’s is still an appealing story. And the success of the IPO process implies that the company’s executives and bankers have pitched it well. GM and others would need to follow Tesla’s playbook nearly word for word, or sell into a much sounder market, to guarantee such success.

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