Tesla stock is off to the races today with a very successful IPO. An expanded number of 13 million shares were priced above the range at $17 last night.

Of course we have seen this race before – quite recently, with A123 Systems (AONE – $9.82), which traded into the low-$20′s before eventually falling back to their Intrinsic Value of about $9 share. Going back a bit we had the same experience with Netsuite (N – $13.44) which traded up to $40 immediately after their IPO (which enjoyed an increased size and filing range too) before trading down to Intrinsic Value a year later. (We’ve added links below to some of these reports if anyone is interested in them.)

In terms of raising money, the Tesla team has to be pleased with the size and pricing of the deal. It’s a great achievement for the investment banking and management team to get this result for a company at such an inflection point, not to mention two years away from generating any fundamental investment value for equity holders.

So from here we turn to our Intrinsic Value estimates for Tesla. Not surprisingly, there is no value there today if one looks out 5 years. However, on a longer-term view there is opportunity for appreciation, particularly in 2012 and 2013 when both production and IV can begin to ramp based on results the company can achieve in 2017 and beyond. We’ve included two IV scenarios for Tesla here for our readers.

We did publish our own report on Tesla over at SharesPost, where there are also a few others to peruse. There are also several good write-ups out there already that can help investors figure out how they may want to participate in this developing space. Here are a few:

Greentech: Tesla IPO – Gentlemen Start your Drivetrains

Why Tesla is Unlikely to Succeed

Although a good deal of the articles and reports on Tesla and the EV industry are skeptical (to put it mildly), there is a major variable that is impossible to quantify at this stage – which is the consumer.

First of all, an EV is great fun to drive. Whether it’s a Tesla or other brand they can be fast and silent which is a real thrill. Electric technology is likely to result in superior vehicles because of the innovation and flexibility that will be possible now in auto drivetrains.

Secondly, the aspect of getting away from gasoline and oil may be a more powerful incentive than many investment professionals realize. Between the ongoing wars in the Middle East, potential global environmental threats, and the Gulf oil spill, people may feel an emotional pull towards EVs that may help make the market develop faster than many anticipate.

The point is that it’s simply too early to pretend that we can really pin down what the broad market will look like and how Tesla will be positioned in 2015. However, we do know that the IV for Tesla will be below the current price for at least the next year. Even using a very aggressive case for the market and company development, the IV ramps only in 2012 and 2013.

Past Research on NetSuite and A123 Systems:

NetSuite IPO Preview.pdf

A123 Update Final Package June 7 2010.pdf

Disclosure: No positions in the shares of the companies mentioned in this post.

We just published a research snapshot on OpenTable (OPEN – $28.75) which includes our typical intrinsic valuation analysis as well as a view of the company.   Unfortunately for current investors the company is worth about 65% less than it’s currently trading at in the market.

This is explained in good part to the fact that you can’t short the stock and there are no options as yet since they just came public.  But all this does is delay the inevitable decline to much lower prices before new long-term investors can buy shares.

We saw the same head-scratching results when Netsuite came public early in 2008.  The shares amazed everyone by trading at $40 (our fairly in depth Netsuite pre-IPO report ($) suggested they were worth $12.)

Of course Mr. Market is not perfect but who is on the other side of this market buying the shares at these levels?  Have they done any valuation work?  Since there is no research available from the brokers yet are they hoping for the impossible which would be a “buy” recommendation at these prices?

The road ahead is fairly well known which is a few months of price declines as brokers come out with their “hold” or absurdly tenuous “buy” ratings, short-sellers are able to borrow shares and the huge piles of VC shares escape the lock-up and come into the market.

If you are or know of who buys stocks like this at these levels please send us an email or leave a comment.  We have a bunch of other things that you or they might want to buy! 

Our full report was sent to Research 2.0 clients but is also available for purchase via the link below.  At the same time our intrinsic value worksheet and a full company model built buy Virtua Research are available for purchase as well.  The easiest thing to do is sign up as a client but we know that many prefer the a la carte solution that the store offers.

Full report link($)

Full company model ($) with tabs for everything used in building a model.

[Disclosure: At the time of this writing Research 2.0 has no position in the shares of OpenTable.]

We have been doing some background research on OpenTable in preparation for a pre-IPO report which we often do for technology and related issues.  (This time we even have a full interactive model behind the analysis from a new research partner that we think will further enhance the interest we get.)

Oddly enough we are just getting started when we ran into the proverbial elephant in the room.  Is the fully-diluted share count on this puppy really 250 million shares. (!)  We’re still going to finish up and publish our analysis and model but how on earth can such an IPO be priced given that current year revenues will fall in the range of $50M?

The simple math of the IPO is that if the deal is priced at $1 the shares will be at 5x 2009 sales.  As one simple datapoint we compare it to Salesforce.com which is sporting a TEV/Revenue multiple of 2.8x.

We’ve looked this over a few times and keep thinking that we are making some incredible mistake.  It’s as if someone forgot to put in the 1-for-10 reverse split to make the math work for the deal to get priced. 

So at the risk of appearing like are dazed and confused we put our observation out there and hope someone can help us to get better information. 

If the company plans to do a reverse split why wouldn’t they do it before filing the S-1?   In this market there’s hardly a huge rush to get filed and out there. 

A 1 for 10 begins to make potential IPO pricing make sense but we would consider a much higher ratio to get the projected price into the double digits.

The open source software (OSS) blogosphere has taken its eye off attacking Microsoft for a few days to focus on a recent BusinessWeek article that predicted a 2007 initial public offering for MySQL. The significance according to OSS partisans is the way it indicates that OSS is taking over information technology to the exclusion of all other software development/business models and user choices. The significance to investors is that Red Hat (RHT), as the only significant pure play OSS provider that is already public, will act as a guidepost to establish MySQL’s valuations.  OSS will probably suffer on both counts.

I leave discussions of the community aspect of this to my OSS product/market research on ebizq.net. But as for the investment research implications, don’t rush into secondary and tertiary rounds of venture funding just yet for every OSS "plan" that crosses your desk. A good business case is still more important than a buzzword such as OSS. And a good business case rests on the functionality that will be delivered, not the buzzword. Even the buzz won’t help assuming investors keep 1998-1999 in mind.

In my opinion, the investment opportunities—and OSS’s future—lies on the application functionality side of the market, not the infrastructure side. I think the OSS operating system/middleware/database train has left the station  The BusinessWeek article (as picked up in my link above by Linux Insider) reports that MySQL is only getting one in a thousand downloads to turn into paying business. The Business Week article does not provide its source for its data but it appears in a sentence preceded by a quote from MySQL’s chairman and followed by a quote from MySQL’s founder. That’s pretty actionable to me. Panelists at a UBS technology conference I attended in 2006 said the same thing for OSS in general. I saw a similarly low ratio of conversions with JBoss when I was doing middleware research for IDC in 2005 and before, a statistic borne out in JBoss revenue numbers revealed in subsequent Red Hat SEC filings after Red Hat acquired JBoss.

There is nothing inherently different about the OSS model in terms of going public. But middleware/database opportunities will suffer because the leading public information technology (IT) companies have already taken over the OSS movement at the low end of the stack. There are very few infrastructure market sectors where an OSS startup can build a revenue stream without running right into IBM (IBM), HP (HP), Oracle (ORCL), and so forth. This group, even arguably Microsoft (MSFT) but that’s another post, have whole-heartedly embraced OSS and embedded Linux, Apache, and so forth into their products and services. 

Red Hat’s timing was excellent. This was true from a product/market perspective. What Red Hat wanted to do was essentially get users to migrate from a moribund Unix market made up of that IT Top 12 group of suppliers, not counting Microsoft, who were backing off their support of Unix. And there it was true from an investment perspective. But JBoss’ wasn’t able to achieve the same result either with the product or investors (other than Red Hat management). WebSphere and BEA (BEAS) WebLogic were too well established to let JBoss do to the middleware market what Red Hat had done to the operating system market.  And in both cases it was the functionality—operating software in one case, application serving in another—that users cared about, not the OSS development or business model.

Using the same criteria, MySQL is probably five years too late. IBM, Microsoft and Oracle will block any kind of growth from the mainstream. They will even do it with an OSS message.

If there will ever be a separate OSS investment story, it will be in the applications space, but even then that will be more a software as a service (SaaS) play than an OSS play.  — Dennis Byron

Tags: MySQL, OSS, Open Source Software, Red Hat, RHAT, Oracle, IBM, WebSphere, WebLogic, BEA

Today we published a short 4 page note looking at Limelight Networks, scheduled to price this Thursday at the high end of their $10-12 range or better.

SUMMARY: Limelight Networks (LLNW) is a rapidly growing player in the very hot segment of content-delivery networks. Investors are already familiar with the space thanks to the stellar success of Akamai (AKAM – $44.) Limelight products and services have a few extra bells and whistles owing to its more recent start but are largely similar to those already available. We expect competition to come from many places, and the company is facing a lawsuit from Akamai. We have incorporated royalty payments in our long-term valuation model (LTV), which suggests a current fair price for LLNW shares of $20.

The full report is only available to paying subscribers so if you click on this link (Limelight IPO Report) it will navigate you through a payment process and then right to the pdf.

If you wish to become a paying subscriber but hate going through the process just send an email to support@research2zero.com and we will send you the PDF and handle the payment manually. It won’t be instant but we will process such requests with alacrity. — Kris Tuttle

Tags: Akamai, Limelight, CDN, AKAM, LLNW

Deltek (NASDAQ: PROJ) filed an IPO with the SEC on May 8. That’s May 8, 2007, not May 8, 1997. I’m reading the S-1 quickly, and it takes me back to the heyday of ERP when Baan, J.D. Edwards and so forth were debuting their IT offerings.

I am reading so quickly that perhaps I am missing something. I see no mention of open source software or SOA. Deltek says, “Our software products depend upon operating platforms and software developed by third parties such as Microsoft, Oracle, Cognos, Actuate, BEA Systems and Sun Microsystems.”

There’s no diversion from the facts to tout the benefits of the SaaS licensing model. Deltek says SaaS is “a model with which we have little experience.”

There is not even a tip of the hat to the concept of professional services automation (PSA), from which Deltek sprung.

Instead, this company took a tack in its SEC filing that I admire: no buzzwords. Deltek says:

• It makes integrated enterprise application software that automates the services rather than the product supply chain (my terminology, not theirs).

• It sells the software to users for a fee in return for a perpetual right to use license and charges an annual fee thereafter to maintain the software at the user’s premises.

• It says it also consults with those users in the product’s implementation and will also run related training classes for the user’s staff.

• And it says, “Our business model depends, in part, on the success of our efforts to increase sales to our existing customers,” and that it “generated less than 5% of our total license revenue in 2006 from international markets.”

• The remnants of Edwards and PeopleSoft are a big part of No. 2 ERP supplier Oracle’s (ORCL) services industries story.

• Although Baan is a part of No. 3 ERP player Infor, which is manufacturing centric (the home of Marcam and Mapics for example), even Infor has its NxTrend construction applications, Infinium hospitality software, and GEAC products for banks and insurers.

• No. 7 ERP player Lawson lost its dominant services industry personality gene through its acquisition of Intentia but Lawson is still is a major factor in the services supply chain.

• Even lacking any particular industry-specific strength, No. 4 ERP player Microsoft does well in the services supply chain.

• And No. 1 ERP supplier, SAP (SAP) offers ERP products aimed at more than 25 specific industries, more than 20 of which are services supply chain centric.

The EMC (EMC) announcement in February about spinning out VMware bothered me. At the time I said it kind of felt like the PeopleSoft Momentum spin-out 10 years ago but I couldn’t say why. Now that EMC has filed an S-1, I have a better analogy. The EMC proposition (it’s in the mail to us shareholders they say) reminds me of the way the Boston Celtics let parquet lovers with nothing better to do with their hard-earned (or even inherited) cash buy a piece of “the Green,” also about 10 years ago: Ownership—with no control—of a dying “franchise.”

Let’s forget the corporate governance issues outlined in last week’s EMC SEC filing. The deal is something along the lines of investors can buy 10% of 10% of VMware, but the investment community’s aggregate share will only be 1% of voting rights because EMC retains a non-public class of shares. And its auditors say VMware has weak internal accounting controls, kind of odd for an almost 10-year-old firm owned outright now for three years by a multi-billion-dollar 28-year-old public company.

The real issue is that virtualization as a separate function may have run its course. Red Hat (RHAT) bundled it into the recent version of its Red Hat Enterprise Linux (RHEL) and Microsoft (MSFT) plans to bundle it into the upcoming server operating software replacing Windows 2003. That’s what Microsoft’s acquisition of Softricity in May 2006 was all about. The Red Hat/Microsoft one-two punch at the low end of the market means today’s separate market for virtualization software may be at its peak right now (at about .3% of total software spend). It’s kind of the spell checker of our time. Here’s the kiss of death: there’s already a standards group for the idea.

Don’t get me wrong. I understand the concept. Working on Multics marketing in the early 1970s, I was there at the beginnings of virtualization that EMC talks about in its SEC filing as if it was ancient history. It goes like this:

• Let’s do for the 25 million x86 servers out there what Multics, VMS, and AOS/VS did for GCOS, VAX, and Eclipse in the 1970s. Admittedly, VMware’s strength is that it can virtualize multiple operating software brands and the earlier products virtualized only their developers’ own operating software. But given the 30-year-plus maturity of this concept and its inevitable commoditization, the barrier to market entry by competitors is low. VMware says as much in their filing.
• While server virtualization makes sense, I don’t understand why I would want to virtualize my desktop PC and laptop? According to IDC (according to EMC), less than 1% of non-server personal computer devices are virtualized. I am surprised it’s that high. Presumably it’s because I need to mix some Linux desktop applications in with my Windows apps? Or turn my desktop into a server? VMware does have some good associated systems and lifecycle management software but Microsoft, Red Hat, BMC (BMC), and so forth will add that capability to their related products just as fast as virtualization reaches commodity status in the mainline operating systems?

Come on, EMC, spin it out or not. If there’s hidden value in VMware, give us our dividend quickly for our patience the last three or four years. I don’t think the value is going to be there very long.

(Byron will own .00000000000000003% of VMware when it goes public because of his vast holdings in EMC.)

Tags: VMware, EMC, IPO, Virtualization

Another boutique investment bank has filed for an IPO. Petrie is in the energy sector so given the current market dynamics everyone will agree that “now is the time!”

Having worked at firms like this for years one can’t resist having a look to see if they have an innovative business model that would actually suggest that outside equity holders could earn strong returns.

Petrie looks to be actually far worse than average. At first glance one is struck by their stunning growth – revenues were up 79% YoY for 1H06 to $62.3M. However expenses were up 81% to $62.2M wiped out any profit for the period. (We understand that typically this is a high period for compensation so overall profits will be better for the calendar year, as they were for the full year 2005, see below.)

Aside from the fact that the company revenues are all directly linked to the red-hot energy sector they are even more concentrated with a full third coming from just one client in 1H06.

For the full year 2005 the company generated a 5.6% net margin. Looking at 2006 we can use $125M as full year revenue and suggest a 10% margin target to guess at a $12.5M net. Putting a 10x multiple on what could be peak earnings for the company and adding the $60M in cash we get to about $200M.

There are plenty of expansion opportunities for the firm in related areas and geographically but they will all involve investment. Due to the compensation overhead ($1.2M/employee in 2H06) the outcome will depend on a sustained level of high activity in energy.

On the surface Petrie looks to be an excellent company in their niche and provides excellent value for their clients and employees. The risk/reward for outside equity holders doesn’t look very good unless the stock is priced at a very reasonable valuation. Investors need to price in the likely case that revenue in a future year will be down and given the business model and compensation structure they are not likely to fare well then.

[UPDATE - Well the company was acquired by Merrill for what was reported to be $500M or so. Even though it's a rich valuation the deal is good for both sides. Merrill has the banking, trading and fixed income operations to make the $500M pay off quickly in what will always be a big sector and the company is spared from the misery of being a low-profit, low-multiple public company.]