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Tesla Motors Files S1; Bankers Think It's Worth at least $1.5BN+

Electric car company Tesla Motors filed it’s initial S1 registration statement today which means that if everything goes smoothly with the SEC it is looking at a late Q2 IPO.   The headline of most stories about the filing is that Tesla plans to raise $100M, but my guess is they are shooting for much more than that.

A few interesting things that I noted while I browsing through the S1:

  1. Tesla has sold a total of 937 Roadsters through December 31, 2009.  It sold 382 in the first half of 2009. Sales jumped dramatically in Q3 2009 to 324 but it looks like sales declined in Q4 to something less than 200 cars (tough to tell exactly).  As of 12/31/09 they had 220 “reservations” for the Roadster or roughly a quarters worth of backlog at the Q4 sales rate.  They will stop selling the Roadster model in 2011 no matter what because Lotus is shutting down their production line for re-tooling and Tesla's deal with Lotus ends in 2011 as well.
  2. They have 2,000 “reservations”, each backed by a $5K deposit, for their “Model S” sedan, due to launch in 2012.
  3. The last round of private financing, Series F, was done in August of 2009 at $2.97/share which equates to about $726M post when you factor in all common, preferred, options and warrants (245M shares).  The Series A was done at $0.49/share.

One thing that struck me is that based on the shares outstanding and the last round’s valuation, as well as the fact the bankers did not reverse split the shares pre-filing, my guess is that they are going to try and market this deal at a price equal to at least $7–$10/share (higher if they can get it).  That implies a post IPO valuation of $1.8BN to $2.5BN.  While they don’t include full year 2009 revenues in the filing, those were likely around $140M, depending on how much Daimler paid them in Q4.  That means that the bankers and investors are planning to take the deal to the market at a revenue multiple of 13–18X trailing 12 month revenues.   Of course Tesla probably has a huge 2010 forecast, which would take that multiple down substantially, but this deal is clearly being priced much more like a technology IPO than an automotive IPO and it will be interesting to see how the street reacts to that.


Please Note: This is not a recommendation to purchase Tesla stock (not that could if you wanted to because it isn’t even public yet).  Please see my disclaimer for more details. 

January 29, 2010 | Permalink


What Will IBM Do?

Back in the 1990’s, Lou Gerstner helped engineer one of the great turnarounds in corporate history.  In just a few years, he took IBM from a cash hemorrhaging techno dinosaur on the brink of being broken into little pieces and turned it back into one of America’s most admired corporations.

To help facilitate its transformation into a services-led business, IBM made many strategic decisions but two of them arguably had particularly important impacts on the rest of the IT industry:

  1. IBM decided it would effectively cede the network equipment business to Cisco via a “win-win” partnership.
  2. IBM exited the enterprise application business and instead focused on getting ISVs to adopt IBM’s middleware stack.

A Vintage Strategy?
Most would agree that by tech industry standards these two strategies were very successful for a long time.  However as we enter the second decade of the 21st century both strategies are also showing their age. 

First and most importantly, IBM’s alliance with Cisco has come to a sudden and, at least seemingly to many in IBM, shocking end.  For years the writing has been on the wall that the networking and Server/Mainframe worlds were on an inevitable crash course, yet IBM and Cisco still maintained publicly that they did not see conflict as inevitable.  It was much to IBM’s surprise then that early last year Cisco launched a line of data center servers.  At the time, most of the press ate up Cisco’s party line that this was about competition with HP, but I doubt that fooled anyone in Armonk, NY.  Cisco’s server launch was was the tech industry equivalent of Pearl Harbor; it was a public declaration of war against the single biggest technology company in the world by an upstart competitor thousands of miles to its west.  Much like the United States in 1941, IBM was unprepared for war with Cisco in 2009, but I suspect that it will have no choice to respond forcefully in the next year or so and its responses may well rewrite the networking industry map because, while IBM may not be fleet of foot, it is the equivalent of a tech super-tanker and once it turns and points its bow, watch out.

The other key strategic decision that IBM made, to stay out of the application business, did indeed help IBM develop a strong “ecosystem” for its middleware offerings, but it also provided Oracle with an uncontested path to consolidate the living daylights of the enterprise application space and that’s exactly what it did.  Fast forward 15 years and Oracle has gone from a very small, but pesky competitor focused on a single software product (databases) to a much larger and well diversified competitor with total software revenues just 10–15% less than IBM’s.  What’s more, through it’s acquisition of Sun, Oracle gained control of Java, the key technology underpinning much of IBM’s middleware stack and it also gained the ability to sell an entire “stack” of both enterprise data-center software and hardware, something that arguably only IBM could claim before .  It’s hard to see how IBM just continues to sit back and let Sun consolidate the enterprise application space, yet getting into that space would violate IBM’s detente with many smaller ISVs.

Thus IBM enters 2010 with two huge strategic problems on its plate:  1.  How does it respond to Cisco’s flagrant attack on its data-center turf.  2.  How does is deal with Oracle’s continued expansion within enterprise applications, as well as its rapid emergence as a legitimate “soup to nuts” IT provider.

Your Move Sir
At a high level, the enterprise tech industry, ex-Microsoft, is now consolidating around 4 $100BN+ market cap companies: CSCO, HP, ORCL, and IBM.  All of these companies, except IBM, have recently made major strategic moves with HP acquiring EDS and 3COM (largely in an effort to catch up to IBM and Cisco), CSCO moving into servers (in an effort to take markets from IBM and HP), and ORCL acquiring Sun (in an effort to compete with IBM and HP). 

IBM, the biggest and most established of them all, has arguably yet to make a major move but strategically it appears as though it may be forced to do something big soon.   For example, it could bring the fight to CSCO’s heartland by acquiring Juniper or just head-off Cisco in the data center by acquiring EMC. Then again, maybe it will take on Oracle and acquire SAP.  I have no idea what IBM will do, but I do know there are a lot of smart people at IBM and I can’t believe they are very happy about the way the playing field shifted last year.  Perhaps they’ll do nothing but double down on their services business, and wait for their competitors to be tripped up by their overly ambitious expansions, or maybe they will open up a case a whoop ass and make some stunning moves of their own.  Whatever they do it will be fun to watch because IBM is still the super-tanker of enterprise IT and whereever they go they are guaranteed to leave a very big wake.

January 25, 2010 in Middleware, Software | Permalink


The Three Horsemen of the VC Apocalypse

The Venture Capital industry is about to enter a kind of mid-life crisis that could test its very foundations thanks to three key drivers:

  1. Returns: For a long time, returns have the biggest selling point for venture capital as an asset class. Thanks the collapse of the tech bubble in 2000 though, historical venture returns are guaranteed to take a huge dive south this year and to fall even further next year.  That’s because 2010 marks the first year in which the 10 year track record of venture capital will not include returns from one of the late 1990’s “bubble years” and 10 year return records are one of the most common yard sticks investors use to judge asset classes.  For example, taking the NVCA/Cambridge returns and indexing them produces a -31.2% decline from Q4 1999 to Q2 2009 (the last quarter for which data is available) and a whopping -43.6% decline from Q4 2000.   Add to this the fact that venture returns did not peak until Q3 2000, and it’s basically a lock that by this time next year the 10 yr venture track record will actually be worse than the public stock market, probably by a signficant amount.  Hard to sell “superior” returns at 2 and 20 when they are worse than a public index fund.
  2. Liquidity:  With 10 year fund lives and 5–6 year investment periods, venture has always been one of the least liquid asset classes.  This lack of liquidity wasn’t a big issue when venture was generating attractive returns and LPs had most of their other assets in publicly traded bonds and equities, however two things have made liquidity a much bigger issue for the venture industry:  1.  Over the past 10–20 years, many LPs have branched out into other illiquid asset classes such as private equity, resources, and land.  2.  The financial collaspe of 2008/2009 highlighted the potentially catastrophic consequences of illiquidity.  Indeed, some of the least liquid LPs, such as major endownments, were forced to borrow money or accept huge secondary sale discounts just to raise short term cash.  The long term consequnces of this near brush with disaster will be felt over time as many traditional venture LPs dial back their overall allocations to illiquid asset classes in general and demand higher returns from illiquid assets.
  3. Correlation:  All practicing VCs know that the Venture market is highly correlated to the public markets, but thanks to its early and, untill recently, uninterrupted success, the venture industry could credibly and mathematically maintain that there was relatively little correlation between venture returns and the public markets.   For example, from 1981 to 2009 there is just a 0.51 correlation between VC returns and the NASDAQ.  In the 1980’s this correlation was actually less than that at 0.48.  Over time though, the venture market has become more correlated with the public market.  For example, the 5 year trailing correlation between VC returns and the NASDAQ was 0.69 as of Q2 2009. What’s more, with the imposition of the FAS 157 accounting standard this correlation is almost guaranteed to increase thanks to the fact that most auditors now use public benchmarks to help establish the “fair value” of venture investments.  It is correlation and not returns which is actually the single most dangerous issue facing the venture industry.  Why?  Because most LPs use modern portfolio theory and that theory holds, generally speaking, that if you add attractive, non-correlated assets to a portfolio you will increase returns while reducing risk.  This investment paradigm is the saving grace of venture capital because it basically compels LPs to add exposure to the venture “asset class”.  However, if the venture and public markets become strongly and consistently correlated, venture may very well cease to become a separate asset class from an investment perspective and thus effectively kill off a huge portion of LP demand for venture capital exposure. 

The net effect of these three factors is that, from the perspective of a limited partner, venture is increasinsly looking like a highly illiquid, poorly performing, levered bet on the public markets.  This is not a receipe for industry success and indeed almost dictates that the size of the venture industry is likely to at least stagnate and probably fall significantly over the next 5 to 10 years.

What Can Be Done?
Unfortnately, there’s no magic cure for these ills. Most VC’s I talk with say something along the lines of “if only all those other idiots would stop investing, things would be fine” which is another way of saying that if less capital was raised and invested overall, returns would recover.  While it is true that less overall capital would likely raise returns somewhat, the venture industry has now matured, in terms of capital and information flows, to the point where returns will likely never revert to their early averages, but to a risk adjusted return that is roughly comparable to the overall market.  As for correlation, venture is what it is.  Fundamentally, venture will always be correlated with the equity markets because VC funds are really just long only micro-cap funds. FAS 157 just drives that reality home.

That leaves liquidity which is one of the areas that VCs can and probably should take a long hard look at because it’s the one driver that they have a degree of direct control over.  While there is a secondary market for VC interests it is very ineffecient by most measures.  This is partially due to the nature of the assets being traded, but also due to the legal structures of VC funds themselves.  Changes to the structure and rules governing VC partnerships as well as the establishment of industry-sponsored secondary market mechanisms could greatly improve liquidity thereby making venture a more competitive asset class.  Without such changes, the venture industry risks a more severe contraction than what already looks likely.


January 12, 2010 | Permalink


Top 10 Best and Worst Software Stocks of 2009

In 2009 Software Sector was up +49.0% vs. the NASDAQ's +43.9% gain and the S&P 500's +23.5% gain.  This is a big improvement from 2008 when the sector was down 40.9%. The average software stock gained +91.1% indicating that small cap companies, particularly microcap companies performed very strongly.  In fact, the average gain for software stocks that started the year with less than $100M in market cap (over 1/4 of the total) was 129.6%.

Despite this year’s massive really, the Software sector is still down -11.9% compared to year-end 2007, but it has performed better than the overall market, as the S&P 500 remains down -24.1% vs. year end 2007.

2009 Top 10 Best Performing Software Stocks
As with this year's Top 10 Internet Stocks, the biggest thing that the Top 10 Software Stocks have in common is that they did relatively poorly in 2008..  The average Top 10 software stock this year was off -52.2% in 2008 vs. the sector’s -40.9% decline. To be included on this year's list, a stock had to start the year with at least a $20M market cap.  Here are the Top 10 Software Stock performers:

  1. Sonic Solutions
    Price Change: 570% Ticker: SNIC
    :  Who says packaged software isn't sexy?  The maker of Roxio and other branded digital media software soared in 2009 after being down -83.1% in 2008.
  2. SourceFire
    Price Change: 376% Ticker:FIRE
    :  Network security vendors did well in 2009, but none did better than FIRE.
  3. Incredimail
    Price Change
    : 328% Ticker: MAIL
    Comment:  Incredimail shifted it's business model from software licensing to search affiliate to the point where it should be probably be shifted to the Internet sector.
  4. Wave Systems
    Price Change
    : 284% Ticker:WAVX
    Comment:  This security software provider finally started to see real revenue traction in its core TPM software product thanks to several OEM deals.
  5. LivePerson
    Price Change: 283% Ticker: LPSN
    : Liveperson's SaaS based customer interaction service saw continued adoption and renewed growth.
  6. Click Software
    Price Change
    : 278% Ticker: CKSW
    : Click Software won several large deals in its core market of "truck roll" scheduling proving that vertically oriented on-premise apps still have some legs.
  7. OpenWave
    Price Change: 251% Ticker: OPWV
    : After declining from $500+/share in 2000 all the way to $0.48 in 2008, this pioneer of mobile browsing and e-mail software finally gained a little positive momentum in 2009.
  8. Blue Coat Systems
    Price Change
    : 240% Ticker: EGHT
    :  Blue Coat saw increased demand for it's proxy and firewall servers in a generally strong environment for security software.
  9. Amicas
    Price Change
    : 226% Ticker: AMCS
    : This manager of clinical radiology and other medical data sneaked into the Top 10 thanks to year end buyout deal with Thomas Bravo.
  10. ModusLink
    Price Change
    : 226% Ticker: MDLK
    : Remember CMGI from the .com era?  They still exist, only now with a focus on supply chain management and sourcing.  MDLK bounced nicely in 2009 as fears of its demise proved over done.

2009 Top 10 Worst Performing Software Stocks

It's not easy to go down when everything else is going up, but these 10 stocks prove that it's possible.   A couple trends really stand out though:

  1. Safe stocks aren't necessarily safe.  As a group, these stocks were down only 16% in 2008 vs. the software sector's 40% decline, with 3 of these stocks actually in last year's group of Top 10 Best Performers.  Turns out these stocks weren't so safe after all.
  2. Financial services software firms saw the impact of 2008 in 2009.  While many banks and insurers saw improved financial performance in 2009, their software suppliers weren't so lucky as capital spending from these banks has yet to bounce back.

To be included on this year's list, a stock had to start the year with at least a $20M market cap.  Here are the Top 10 Worst Software Stock performers:

  1. Purple Communications
    Price Change: -93% Ticker: PRPL
    :  Purple provides software and services to the deaf and hearing impaired.  Turns out they were a little "tone deaf" to certain FCC regulations and are now under active investigation.  That investigation plus a mountain of debt was enough to make PRPL our worst software stock of 2009.
  2. Selectica
    Price Change: -84% Ticker:SLTC
    :  Some may recall this "configurator" software from the boom days when its market cap surpassed $5 billion.   Long way from $5BN now.
  3. Jacada
    Price Change
    : -51%% Ticker: JCDA
    Comment:  This CRM provider saw its business continue to decline as big wins in one of its largest verticasl, financial services, dried up.
  4. VASCO Data Security
    Price Change
    : -39% Ticker:VDSI
    Comment:  This provider of security "tokens" to large banks saw its business languish in 2009 despite improvements at its customers.
  5. Konami
    Price Change: -30% Ticker: KNM
    : Video games is a "hits business" and Konami could use a few hits.
  6. Sapiens
    Price Change
    : -28% Ticker: SPNS
    : In a reversal of fortunes, last year's #1 performer is this year's 7th worst performer as providing software to insurers proved to be a little less cycle resistant than the market believed. 
  7. Cogent
    Price Change
    : -23% Ticker: COGT
    : Last year's fourth best performer, also saw a big reversal in fortunes as this provider of fingerprint recognition systems to the government apparently didn't get as much of the stimulus money as investors anticipated it would.
  8. Phoenix Technology
    Price Change
    : -21% Ticker: PTEC
    :  The #1 provider of BIOS software struggled to reinvent itself and amidst soft PC demand.
  9. S1 Corp
    Price Change
    : -17% Ticker: SONE
    : Yet another Top 10 performer from 2008, this provider of online banking software saw its business suffer as its banking customers licked their wounds.
  10. EPIQ Systems
    Price Change
    : -16% Ticker: EPIQ
    : If you had told me at the beginning of 2009 that a company focused on providing software and services to the bankruptcy industry would be one of the year's worst performers in 2009 I would have laughed, but that's exactly what happened.  EPIQ was only down 4% in 2008 as investors clearly anticipated that 2009 would be a banner year.  I guess it wasn't banner enough.

Note: This is not a recommendation to buy or sell these stocks or anything else.  It is not investment advice, it is just an objective list of past stock performance.  Please see my disclaimer at the bottom of this post.

January 4, 2010 | Permalink | TrackBack


Top 10 Best and Worst Internet Stocks of 2009

After a dismal 2008, Internet stocks crushed the overall market in 2009, with the sector up +89.9% vs. the NASDAQ's +43.9% gain and the S&P 500's +23.5% gain.  The average Internet stock gained +91.6% indicating that the gains were pretty evenly spread across small and large cap companies.

Despite this year’s massive really, the Internet sector is still down -9.2% compared to year-end 2007, but it has performed much better than the overall market, as the S&P 500 remains down -24.1% vs. year end 2007.

2009 Top 10 Best Performing Internet Stocks
There’s no clear theme to this year’s crop of winners, other than they were all big losers last year.  The average Top 10 stock this year was off -64.3% in 2008 vs. the sector’s -52.2% decline. To be included on this year's list, a stock had to start the year with at least a $20M market cap.  Despite that very low bar, fully 15% of Internet stocks did not qualify.  Of the ones that did here are the Top 10 Performers:

  1. Internet Gold
    Price Change: 710% Ticker: IGLD
    :  After being down 80% in 2008 this Israeli ISP was true to its name in 2009.  The cynic in me wonders just how much of this price appreciation was due to the fact that IGLD has “Gold” in its name, but it is what it is.
    Price Change: 275% Ticker:LOCM
    :  Local advertising became a hot topic in 2009 and benefited from the buzz as well as signs of real traction in its business model.
  3. US Auto Parts
    Price Change
    : 274% Ticker: PRTS
    Comment:  The web’s largest retailer of auto parts was down 83% in 2008 as the entire auto industry imploded, however PRTS saw a decent recovery in 2009 as investors realized that old cars still need new parts.
  4. Kongzhong
    Price Change
    : 270% Ticker:KONG
    Comment:  This Chinese mobile internet services provider saw good growth, especially in it’s mobile gaming business.
    Price Change: 252% Ticker: TREE
    : Otherwise known as LendingTree, this online mortgage lead gen site recovered from a brutal 2008 thanks to cost cutting and a favorable mortgage refinancing environment.
  6. Webzen
    Price Change
    : 251% Ticker: OMTR
    : Webzen is a major Asian provider of online games, especially in Korea.  It was down 78% in 2008 but saw good growth in 2009 and renewed investor enthusiasm for online gaming.
    Price Change: 238% Ticker: UBET
    : Youbet is the only public company to operate a legal online gambling site in the US (online betting for horse races is legal in the US). It saw questions about its viability subside in 2009.
  8. Packet 8
    Price Change
    : 219% Ticker: EGHT
    :  This provider of SMB focused hosted IP PBX VOIP systems became solidly profitable in 2009 and benefited from investor enthusiasm for all things SaaS.
  9. Mercadolibre
    Price Change
    : 216% Ticker: MELI
    : Brazil’s answer to EBay and Amazon recovered from emerging market jitters in 2008 to post a strong growth in 2009.
    Price Change
    : 215% Ticker: BIDU
    : China's leading search engine recovered from a -67% loss in 2008 as it put distance between itself and Google and clearly enjoyed the favor of the Chinese government.

By the way, the top performing internet stock in 2009, regardless of market cap, was VOIP services provider Delta Three (DDDC), it was up a whopping 2,213%.  Despite this amazing gain DDDC is still down -7.5% from its year end 2007 close.  Now that’s a ride!

2008 Top 10 Worst Performing Internet Stocks

Believe it or not, there were some Internet stocks that did not go straight up this year.  In fact about 15% of Internet stocks actually went down this year, a truly dubious achievement when the rest of the sector was up 90%.   As with our top performers, to be included on this list of shame, a stock had to start the year with at least $20M in market cap. The Top 10 Worst Performning Internet Stocks of 2009 are:  

    Price Change: -63% Ticker: DIET
    :  DIET almost starved itself to death in 2009.
    Price Change: -57% Ticker:BIDZ
    :  This Canadian competitor to Blue Nile ran into the two words most dreaded by a public company: accounting irregularities. 
  3. The9 Limited
    Price Change
    : -46%% Ticker: NCTY
    Comment:  Having the World of Warcraft license for online game crazy China is a sure thing right?  Not if the Chinese government bans it.
  4. Atrinsic
    Price Change
    : -43% Ticker:ATRN
    Comment:  Not a good year for this online marketing services company.
  5. Gigamedia
    Price Change: -42% Ticker: GIGM
    : Online gaming and gambling company saw revenues from its European poker and Asian gaming divisions fall.
  6. Looksmart
    Price Change
    : -37% Ticker: LOOK
    :This search services provider searched in vain for a viable business model in 2009.
  7. 1–800–
    Price Change
    : -31% Ticker: FLWS
    : If you know a investor in 1–800–Flowers in 2009 you might want to order them some lillys.
  8. Chartwell Technology
    Price Change
    : -28% Ticker: CWH.TO
    :  This Canadian listed provided of online gaming technology saw few customers in 2009.
  9. Marchex
    Price Change
    : -13% Ticker: MCHX
    : This online "pay for performance" marketer was hurt by mounting consumer complaints and a congressional investigation into the industry.

Note: This is not a recommendation to buy or sell these stocks or anything else.  It is not investment advice, it is just an objective list of past stock performance.  Please see my disclaimer at the bottom of this post.

January 1, 2010 | Permalink | TrackBack