Tesla stock is now back below its IPO price. | Hacker News Reader

Tesla stock is now back below its IPO price.

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43 pointsphreeza69 comments

Pretty much exactly what that guy from Mad Money predicted would happen.

I wouldn't invest in Tesla. Either electric cars take off or they don't, but if they do then the big car companies can easily muscle in and eat Tesla's lunch. Nissan and Chevy both have electric cars coming out soon which will present a much better value proposition than the Tesla Model S.

By that logic, no startup that somehow touches on established players markets would be worth doing.

A bit like saying Writely should never have built a web-based text processor because Microsoft can "easily muscle in" and eat their lunch.

What I should have said is that the car industry, unlike the software industry, has huge advantages for big players (due to the enormous capital cost of... well, nearly everything), and small advantages for first movers (due to the near-nonexistent network effects).

Yeah, but the product cycle is 2-4 years. Plenty of time for you to get rich by being bought out by the big guys to accelerate time to market, or by land-grabbing a decent market share in that window before they catch up to you.

That's largely true.

Writely and Word are in different markets - the market for web-based cloud word processors is very different than the one for full-featured desktop word processors. Same goes for most of the web startups that have succeeded.

Somebody is inevitably going to bring up Google, since there were established players in search when Google was founded. But at the time of Google's founding, all the established players in search thought that their business was in portals, leaving the search market itself open for a hungry competitor.

Clayton Christensen has more on this in The Innovator's Dilemma/Solution. Innovations that make things better for an established market's existing customers tend to be sustaining innovations, benefiting entrenched players. Even if a startup gets a foothold on one, they can and will be bought out or outcompeted by a big firm, which has more resources and every incentive to pour them into development.

Innovations that make things better for a new and untapped customer base, however, tend to be disruptive innovations, the sort of which new successful startups are made. The defining characteristic of disruptive innovations is that they're less profitable than sustaining innovations: therefore, at every point in time, the large entrenched competitors have every incentive not to succeed in the startup's market. Things like the PC for IBM, the web for Microsoft, free online access for newspapers, and search for Altavista.

Note that in all cases, those companies did enter the new market, they just didn't succeed in it. Because it was not in the company's interest to succeed: A success would mean that the company's overall profit is less than it started with, which is awfully hard to justify to shareholders.

I'm not entirely sure which category Tesla fits into, but I'm having a tough time seeing a $109k roadster and $57k sedan as disruptive innovations, which usually target cheaper market segments that big companies overlook as unprofitable.

I pretty much agree, just one more thing to add. Disruptive innovations are more about the market and business model than the technology itself. That's why relatively crappy inventions can take root.

For instance, PCs were not good compared to mainframes or workstations, but they were bought by people that weren't buying workstations. This gave them the chance to build businesses and improve until they could later compete with, and displace workstations.

For Tesla, what is the disruptive market? I'm not sure. Their cars do the same things as other cars, with different inputs. If their "disruptive" niche is to be an eco-fashion symbol, and that gives them time to build a car whose TCO is 20+% less because of the difference in fuel cost per mile, then they have a shot.

For what could truly be disruptive to personal transportation is Better Place ( http://www.wired.com/cars/futuretransport/magazine/16-09/ff_... ). Sure, it's expensive, limited, and poor right now, but if it can work in Israel, Denmark, and Hawaii, and prove and grow the business from there, it can change things in a much bigger way than Tesla can.

You can sell electric cars on subscription where the customers pays per km driven. That might be a disruptive business model. Some companies are already doing so.

I agree with some of your points, but I think "avoid competition / competitors' markets" is a fallacy and bad advice.

Successful companies succeed in the face of competition, and capitalize on some opportunity, which could be a technology, a market shift, a business model, or a partnership. You can often turn this "seizing a (unique) opportunity" truism into a "looking where others didn't" story in hindsight, and start getting excited about real "off the map" innovations, as if there's something inherently good about that, business-wise. In Google's case they simply came up with a better business model, though their tech strength helped.

Altavista was a search company. Google didn't succeed by not stepping on Altavista's toes in the "portal market" (which I'm sure is entirely distinct from the web search market), they just built a better search business.

Successful companies succeed by picking their competition carefully. You want to compete with firms that either don't know or don't care about your customers' use case, so that you can bring more resources to bear on this particular problem than they can.

Altavista was a search company, but in the late 90s, they didn't particularly care about search. If they did, they could easily have copied PageRank (which was published, and the patent is owned by Stanford anyway) and search ads (which were done by Overture before Google) and done as well as Google did. They didn't realize that it was a threat until Google started making serious inroads in the early 2000s, though, and by then it was too late. (Interestingly, both of the founders of Altavista ended up working at Google.)

> muscle in and eat Tesla's lunch

This would largely depend on whether Tesla would strive to become a mainstream car maker or would choose to retain its focus on building luxury/exotic cars. Think Aston Martin kind of company.

Though they have already announced an average-priced sedan version that was scheduled for mass production in 2012, so I guess they are going after the behemoths.

Luxury and exotic cars is a terrible business to be in. Small-volume supercar manufacturers pop in and out of existence every few years, leaving behind tiny production runs of awesome-looking machines and no spare parts.

The only luxury/exotic car manufacturers which have survived are the ones which managed to pick up enough of a history to be bought out by a much larger mass-market brand as a halo. afaik they mostly operate at a loss. Bentley, Lamborghini and Bugatti belong to VW. Ferrari is Fiat. Lotus is Proton, and Rolls-Royce gets passed around like a cheap hooker. Only Aston Martin is currently owned by someone other than another car company, but that may not last.

> afaik they mostly operate at a loss

As much as I trust your "afaik", I find it very hard to believe. For example, the "cheap hooker" raked £593m of profit in 2008 according to http://www.rolls-royce.com/investors/news/2009/300709_2009_h...

That's Rolls-Royce plc, the publicly-listed company that mostly makes aircraft engines, not Rolls-Royce Motor Cars, the completely unrelated subsidiary of BMW that makes... well, motor cars.

The history of the two is awfully complicated, but I gather that they've been separate entities since 1973.

What about Porsche, BMW and Mercedes?

Any business is good to be in - provided you're good enough. There's no such thing as easy money.

Porsche was recently pulled into VW, though Porsche nearly succeeded in buying VW earlier. Mercedes and BMW (but especially Mercedes) are more upper middle class than truly luxury.

Porsche was the most profitable car company in the world prior to the VW takeover debacle.

Ironically, though, it was mostly from selling SUVs instead of sports cars. Which just shows that selling overpriced oversized ego vehicles is the best way to make money in the car business.

Low-end luxury seems to be very profitable, as those three companies demonstrate. They're comfortably away from the cost-cutting at the bottom of the market, but still accessible to a large number of customers.

It was the really high-end cars ($100K+) I was talking about as apparently being unprofitable.

Mercedes and BMW manufacture and sell cars in the price range you are talking about.

You mean the Aston Martin that was part of Ford until 2007?

Ford still own a portion of and to which they contribute the parts and engineering know how.

Last I heard the model S was going to start at 49k. That definitely is in the luxury car price range, and not competition with toyota/nissan/etc.

If Tesla develops relatively good technology and a good patent portfolio then it is much more likely that they would get purchased than simply be out competed. If they are purchased while on the path to success it is likely that the founders and many early investors will make a very nice sum in the process.

Don't forget that Toyota has a stake in Tesla, and they are a big car company. It's not inconceivable that Toyota could assist in distribution, as it doesn't directly compete against the Prius.

Or they could say "thanks for the technology, suckers!", write off their piddly $50 million investment in Tesla, and start cranking out electric Corollas from a factory in Yokohama and/or Guangzhou.

While this outcome would not be very glamorous, I'd might still be worthwhile for the founders.

It wouldn't surprise me one bit if down the road Tesla became a Toyota-owned & operated brand, much like Scion is today.

I don't believe the IPO is about the model S; it's about ramping up to build a sub 30K (or was it 20K) model at the newly acquired plant in Nor Cal, partnered with Toyota.

citations? I thought it was about the model S, e.g. model S _is_ their consumer model.

wikipedia: "On May 20, 2010 Tesla Motors announced it would form a partnership with Toyota to produce a new lower-priced model along with the Model S at the former NUMMI assembly plant in Fremont, California.[6]"

I am confused by our comment, jaekwon. It seems as though you are asking for proof and then give it. Maybe I am just misunderstanding, but the wikipedia quote does state that there is a new model along with the Model S.

You got me. I guess I skipped the words "along with" when scanning. To my credit, the cited link [6] tells nothing about a new lower-priced model other than the Model S.

To the best of my knowledge, none of the big car manufacturers have any electric cars that is anywhere comparable to the mileage of Tesla. The second best option, Nissan Leaf, has less than half of Tesla's mileage.

Can anyone else verify this?

I assume by "mileage" you mean "range"? But yes, the Leaf has a shorter range than the Tesla Roadster, and is also a lot cheaper. Price vs range is the basic tradeoff when building an electric car. Nissan could build a more expensive Leaf with a longer range if they thought there was a market for it.

I like the Chevy Volt's best-of-both-worlds solution, since it will do your sub-40-mile commute on electricity but still fire up its petrol-powered generator if you want to do hundreds of miles on the weekend. For an electric car, a zero risk of getting stranded is a huge selling point.

That may be true, but only because the Tesla Roadster has twice the battery capacity (53 kWh vs Leaf's 24 kWh). The Roadster battery costs about $36,000, which is more than the sticker price of a Leaf. The Roadster is supposed to get 21.7 kWh/100mi, which is about the same as the Leaf (22.5 kWh/100 mi) and the Volt (25 kWh/100 mi). Given the current (im)maturity of the electric car industry, I would say those numbers are too close to differentiate.

[http://en.wikipedia.org/wiki/Tesla_Roadster]

[http://en.wikipedia.org/wiki/Nissan_Leaf]

[http://www.businessinsider.com/theres-no-way-the-model-s-jus...]

I did buy some, but I only sold about half when it was up 50%. I own a lot more of BYD, which is way up from when I got hold of it. I am still not sure the whole electric car concept makes sense yet.

One thing about plugin electrics that gets me though is that, for me, they switch from gasoline powered energy to coal power off of the grid, which would seem to be a bit more carbon-y.

Another slightly amusing negative is that the current Energy bill winding its way through congress looks like it is going to put a carbon tax on utilities (where the power for the cars would be paid) and not on gasoline, thus making it potentially more expensive for electric power than gas power (and making the scapegoat utility companies appear to be raising rates for customers while the politically unpopular gas tax is avoided.

> Pretty much exactly what that guy from Mad Money predicted would happen.

How so? Mad Money was bearish on Tesla as a company and so far since its IPO it is beating the market as a whole (the Nasdaq Comp and the S&P 500).

Well, he predicted a first-day bump followed by a long slide. There's still room for him to be proven wrong, though.

The speculators done gone made a lot of money off the geeks. Tesla was a typical speculator IPO, now the reality of the risk facing the company will set in and the price will go to its standard level till they start to show real potential.

Are you talking about the geeks at Tesla or the geeks who bought stock after the price jumped?

If the former, companies often IPO at prices below what they're worth--if the IPO is issued at a fair price, then it's Tesla that benefits, not the speculators. If the latter, buying stock because it's going up is an act of speculation, not necessarily geekishness.

Yes, I don't really get why any company would IPO below their fair price. Every time I see a company's stock go up massively on the first day, I ask me "Why did they not charge a higher price for their stock in the first place?".

Leaving money on the table during an IPO is often attacked as a form of fraud. I recall it was a big issue during the peak of the Internet boom, 1997-2000. There you had a lot of startups desperate for money to fund their growth, and yet they gave away substantial amounts of money to speculators. There were clear abuses of "Friends and Family" blocks of stock -- these started getting handed out to anyone who could move the deal forward, with the understanding that the stock could be dumped on the opening day of trading. This amounted to a kind of bribe, an additional payment made in excess of all the normal IPO fees.

Wikipedia offers this:

http://en.wikipedia.org/wiki/Initial_public_offering

"The underpricing of initial public offerings (IPO) has been well documented in different markets (Ibbotson, 1975; Ritter 1984; Levis, 1990; McGuinness, 1992). While Issuers always try to maximize their issue proceeds, the underpricing of IPOs has constituted a serious anomaly in the literature of financial economics. Many financial economists have developed different models to explain the underpricing of IPOs. Some of the models explained it as a consequences of deliberate underpricing by issuers or their agents. In general, smaller issues are observed to be underpriced more than large issues (Ritter, 1984, Ritter, 1991, Levis, 1990) Historically, IPOs both globally and in the United States have been underpriced. The effect of "initial underpricing" an IPO is to generate additional interest in the stock when it first becomes publicly traded. Through flipping, this can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in "money left on the table"—lost capital that could have been raised for the company had the stock been offered at a higher price. One great example of all these factors at play was seen with theglobe.com IPO which helped fuel the IPO mania of the late 90's internet era. Underwritten by Bear Stearns on November 13, 1998 the stock had been priced at $9 per share, and famously jumped 1000% at the opening of trading all the way up to $97, before deflating and closing at $63 after large sell offs from institutions flipping the stock . Although the company did raise about $30 million from the offering it is estimated that with the level of demand for the offering and the volume of trading that took place the company might have left upwards of $200 million on the table."

All the same, Wikipedia also offers a charitable explanation for the phenomena:

"The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value."

The term "pop" is sometimes used to describe the immediate post-IPO jump.

A small amount of "Pop" (no more than 10 percent) isn't a bad thing. It is a result of oversubscription, which every underwriter needs in order to assure they aren't left holding the bag. It also makes stabilization (the only legal form of market manipulation) less expensive for the underwriter.

You're going to see more extreme cases of "pop" in a market with a lot of uncertainty (like we have now). This is the underwriter being cautious. Their worst case scenario doesn't appear and the IPO turns out to be underpriced.

What we saw in the late 1990's was heinous. I worked at a startup investment bank (Epoch Partners) that was intended to take some of the pop out of IPOs (and make allocation more available to genuine retail investors).

-r

Yes, but why care about underpricing at all? Can't you just have a formal auction, where everybody states (legally binding) how many stocks they want at which price level (e.g. for 3$ I'd buy 10 stocks, for 5$ I'd buy only 8 stock, and so on, basically giving your demand function) and then do a simple optimization that finds the highest price at which all shares sell. (Or alternatively, and perhaps better, the lowest price at which everybody who wants to pay at least this price, can buy.)

Why rely on guess work?

Edit: I saw on the linked Wikipedia article that some people have tried auctions. Google seemed a noteworthy example.

Epoch had an auction equivalent process (which we didn't get to implement because we didn't get to the point of being lead underwriter).

They don't sell all of their stock at the initial price, but sell it later at the higher prices.

OK. But still, why sell even some of the stock lower than necessary? Or does the excitement created pay off in the longer term?

In general, the occasional underpricing could be dismissed as a mistake, but when there is a sustained pattern of it, you have to wonder if the underwriters of the offering are not trying to thicken their profits by opening the door to further speculation of their own.

If the speculators are able to make money off the geeks, who are the real geeks then?

The finance geeks made money off the technology geeks?

Alpha males win again. Keep trying, beta males.

http://www.google.com/finance?q=goog

Flawless victory.

That's a very literal alpha:

http://en.wikipedia.org/wiki/Alpha_%28investment%29

The real smart geeks road the wave to 40% then shorted them on the way back down.

I'd be surprised if there was sufficient liquidity for shorts so soon after the IPO.

http://twitter.com/jackflips/status/17370679933 :)

I will argue that this is a good time to buy Tesla Stocks; this is a time for real geeks to make money.

No, not yet. A lot of people are going to panic sell. Then you will have those who will hold on hoping it goes back up at least to what they paid for it. The moment it does they too will sell.

Wait till it stops going down, goes up for a bit, then down again. Only then think about buying.

And for those who are hoping it goes up to at least what you paid for it: Please be aware you ALREADY lost your money. Waiting for it to go back up is poor investment strategy. You don't loose your money when you sell - you loose it instantly. Either you think it's a good buy right now (in which case buy some more, or hold what you have), or you don't think it's a good buy _right_now_, in which case sell and it makes no difference what you paid for it.

Waiting for it to go back to what you paid for it will make you feel better, but in the long run you will loose money that way. Only keep a stock if you think it's a good buy at all times - pay absolutely no attention to what you paid for it. The present, and future is all that matters, the past doesn't.

Yes, if you have spare capital, invest some in Tesla now with the risk of losing most of your investment. Think long term.

Depending on the general mood of the stock market, I think the price will hover around 15~17 until we hear more news in the coming weeks.

Actually, the reason for the insane run-up on it's inital day and second day of trading had very little to do with speculation, but more to do with TSLA being an "extremely hard to borrow" stock on those days. When a stock is hard to borrow, it means it is nearly impossible to short sale the stock. Think AIG when they were melting down. That was a stock that no one wanted loan out for short sales because at the time, their demise was imminent. Not necessarily the same thing with TSLA, but that's what hard to borrow equates to...

So all theories and ideas of why the run up and why the subsequent sell off are essentially wrong. When a stock can only go in one direction, then it can only go in that direction.

Maybe a perfect time to buy?

Their brand is now recognized as the electric car manufacturer. As long as this trend continues, they will submerge as the winner.

I've also heard that their technology is somewhat unique and that they've found solutions to many hard problems. Do they have any patents?

...they will submerge...

Freudian slip?

Sorry about that. You're right. http://www.google.is/search?q=define:submerge

I'm not a native English speaker, so sometimes it's difficult to find the right word and something pops up in my mind and I think it's correct.

The word you were looking for was emerge.

Exactly ! Thanks :)

> Their brand is now recognized as the electric car manufacturer.

The question I would ask before investing is: how many people care? It's good to be the market leader, but still not worth much if your whole market is tiny.

Maybe this is a national perspective thing: I'm in the UK, and the car market does vary more than most from country to country. But over here, I'd say the main interest in new drives today is in hybrids rather than pure electric cars. The network of charging stations required for pure electric just doesn't exist yet. In hybrid world, the Prius rules for everyday driving and Lexus have run a good PR campaign to claim the high end of the market, and it's hard to see how anything Tesla have proposed so far would create any significant shift.

Not surprising. The market's collective thinking is normally pretty short-term, and shares of a company that's forecast involves a best case scenario of generating real revenues 2 years from now wouldn't be expected to be in-demand.

It's interesting how this has changed since the dot-com boom, where shares of AMZN in 1998 had the same price that they did in 2008, even though it wasn't expected to turn a profit until 2002.

Why are there no stock options (calls/puts) offered for TSLA? Will that change in the future?

Yes. Not enough historical volatility currently to price options contracts accurately.

Thanks. I didn't think about that. How much history would they want?

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