Fallout From the Tesla IPO: Investing in Advanced Batteries

Tesla had a warm welcome at its IPO with a 40% first day jump and a 60% run to over $30 from opening at $19, but has since given back most of the after-market gain to close back at just above $19. This pattern is eerily like the IPO of A123 Systems (AONE) a lithium-ion battery maker for electric vehicles: a first day pop then a drop. AONE continued to fall in a long slide to 35% below the offering price six months out. Tesla’s trajectory created a “very ugly” inverted hammer candlestick at the top, which denotes a legion of quick flippers speculating rather than long-term holders. Tesla Motors (TSLA) priced at $17 but opened at $19, where it garnered a lot of buying interest. It may find support there; if it breaks below, it could be dumped.

Goldman Sachs helped underwrite the Tesla offering, and about the time of the IPO, launched a research report on lithium-ion battery companies which had a Neutral rating to reflect “a multi-year waiting period prior to clarity on plug-in hybrid and electric vehicle mainstream market adoption.” Their main observation is that these advanced battery stocks are no longer trading on news but the market is awaiting proof points. Even this relatively cautious research report was found to be too optimistic due to expecting a too-steep drop in advanced battery costs due to economies of scale and a race by Asian makers to strive for share over margin.

Let me be the optimistic here. We saw the sort of price drops Goldman expects (if not even steeper) in DRAMs and LCDs due to massive investment in Korea, Japan and China in scale manufacturing facilities. We also see rapid innovation emerging – for example, an apparent breakthrough in quick charging of these batteries: three minutes to 50% charge, about the time at the gas pump, or five minutes to 70%. Gas stations could add this as a new type of pump – and the price will be a lot lower per mile traveled.

For Tesla investors, the Goldman report has a message: the premium in cleantech stocks seems to be gone, and now these companies will trade on results. Whether Tesla can remain above $19 is a good test of Goldman’s thesis. Even so, if the stock decays as flippers abandon it, it should then find a strong bottom as A123 seems to have. At that point this becomes a bit of a long slog, but one with upside. Tesla as a business will grow in the near-term on technology deals with partners like Mercedes and Toyota, and in the longer term on getting its new S line out in 2012.

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About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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