Tesla .... an IPO case study

Tesla Shares Jump on Their First Day

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Shares in Tesla Motors proved on Tuesday to be as coveted as the electric cars the company produces, as its stock rose about 8 percent above its initial public offering price.

Tesla, appearing on the Nasdaq stock market under the ticker symbol “TSLA,” traded at about $18.40 in early afternoon trading. Shares opened around that level, then plunged before climbing back up.

Tesla’s underwriters on Monday, sensing bigger-than-expected investor appetite for the offering, raised the initial sale price to $17, above the $14 to $16 expected range. They also increased the number of shares to be sold in the offering by 20 percent, to more than 13 million shares.

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Tesla Investors Should Be Wary of the Road Ahead

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While the company has produced total revenues of $147.6 million, it lost $31 million in the first nine months of last year and to date has accumulated losses worth nearly $240 million. It will be another two years before its family car hits the market, so Tesla’s losses are sure to get a whole lot deeper. Every red cent of the $220 million or so in cash raised from this week’s IPO will more than likely get chewed up in the next year.

Is Tesla worth $2 billion? First, that depends on whether you believe in the market for electric cars. The outlook certainly looks promising, especially given that battery-driven cars will clean up the environment and reduce dependence on foreign oil. But confidence in Tesla’s valuation also depends on whether you think Tesla can succeed in what will likely be a very crowded marketplace. General Motors and Nissan are launching EVs before the end of this year. Ford (F) will have a battery-powered van out soon, too. Thanks to new stringent fuel-efficiency standards, every mass-market carmaker is working on electric cars.

For that reason, Tesla stock deserves much caution.

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Benjamin Graham: The Intelligent Investor recommends against investing in IPOs