A Telsa $226 Million IPO: A Road To Disaster

Telsa’s IPO priced at $17, above the anticipated range of $14 to $16. The company sold 3.3 million shares and raised $226 million. The IPO was the first for a US car company since Ford Motor’s (NYSE: F) in 1956.

Goldman Sachs Group, Morgan Stanley and JPMorgan Chase & Co. and Deutsche Bank AG led the offering. Telsa needed the money. It has invested $230 million since it started and has built 1,000 cars. The company will use the new proceeds to build its lithium-ion battery-powered Model S which sells for just under $80,000.The Telsa is is likely to go the way of the DeLorean DMC 12 which was introduced in 1981. The car carried a premium price and competed against high-end US sports cars. Competition from existing vehicles such as the Corvette drove DeLorean into bankruptcy.

Telsa has a similar problem. Most large global car companies are within a year or two of launching their own electric models. Almost all major vehicle manufacturers have “green” hybrid cars that are aimed at the same segment of environmentally conscious drivers. Lexus markets high-end hybrid including its LS and GS models.

The Telsa is too “niche” a vehicle to be successful. Even with its IPO proceeds it can only build a few thousand cars. Like the DeLorean, it will not have enough dealers to service its cars (it has 11 now) beyond a few major cities, a big drawback for most drivers. And, the car has very little track record, which means that potential owners have no idea how many flaws there may be in Telsa’s manufacturing process.

The novelty wears off soon when the reality of buying a vehicle from a tiny car company sets in.

Douglas A. McIntyre