Thursday, September 24, 2009

A123 Systems (AONE) - Hype or Hope?

An interesting IPO today in A123 Systems (AONE) - I don't know enough about it to tell if it is hype or hope. I do remember similar companies a decade ago flying off the handle on hype - Ballard Power (BLDP) and FuelCell Energy (FCEL) are the first two to come to mind. [I encourage you to pull up a 10 year chart of Ballard Power or FuelCell to see where they used to trade in 1999] A decade later neither of these are making money - but I am sure the "hope" remains. ;) Since we seem to be returning to a lot of the same situations as we saw in the NASDAQ a decade ago in terms of ever upward markets, rampant speculation, and laughter at valuation analysis; I suppose it is appropriate we start seeing similar type of stocks get the hype.

Here is a quick overview per CBSMarketwatch followed by a (surprise!) bullish viewpoint via CNBC. The stock is set to come IPO in the coming hours; demand is high as this is oversubscribed - and why not, it has all the sexy code words. Being profitable is not a condition to buy stock hand over first these days; and frankly who knows how to value a company like this.

p.s. I do like this sector and it should be a very large growth opportunity in the coming decades but much like solar - just because the macro story is good, doesn't mean it will be easy or clear to figure out who the eventual winners are. But in both cases, it really doesn't matter in the short run - speculation works fine in the near term.
  • A123 Systems Inc. priced 28.1 million shares at $13.50 each, raising $378 million ahead of its stock-market debut on the Nasdaq on Thursday.
  • Tapping into growth expectations for electric vehicles and billions in stimulus for the sector from the U.S. government, the Watertown, Mass.-based lithium ion battery maker is going public above its already-increased range of $10 to $11.50 a share. In another bullish move, the size of the initial public offering was increased by 2.4 million shares from its earlier level of 25.7 million shares.
  • A123 Systems, an eight-year-old battery builder launched by engineers from the Massachusetts Institute of Technology, has yet to turn a profit. But it carries some marquee investors in its list of principal shareholders, including Qualcomm (QCOM), Motorola (MOT), and North Bridge Venture Partners.
  • Based on data from IHS Global Insight, the number of hybrid electric, plug-in hybrid and electric cars will grow from 19 models in 2009 at an annual production rate of at least 20,000 vehicles to more than 150 models in 2014 and more than 200 models in 2019, A123 said in its IPO filing.
  • A.T. Kearney projects the market will grow to about $21.8 billion by 2015 and $74.1 billion by 2020, stoked by governmental regulation, emerging powertrain technology and rising consumer demand.
  • Two of the company's three founders listed on its Web site hail from the school (MIT), including Yet-Ming Chiang, who also co-founded American Superconductor Corp. (AMSC)
  • The company reported a loss of $40.7 million on revenue of $42.9 million in the six months ended June 30. In the year-ago period, it lost $33 million on revenue of $21.9 million. A123 lost $81 million in 2008 and $31 million in 2007. It also reported 1,672 employees as of Aug. 31, up from 227 at the start of 2007.
  • For the six months ended June 30, business from BAE Systems PLC represented 37% of A123's revenue.
  • On Aug. 6, A123 won $249 million in federal stimulus funds, which the company plans to use to build factories for making batteries

  • As IPO's go, A123 has elicited a fair amount of discussion, much of it boiling down to this question: Is buying into the promise of the Massachusetts-based battery maker the same as buying into the hype that surrounded ethanol related stocks a few years back?
  • The battery maker is being touted as a play on the hybrid and electric car market. This is largely because it makes lithium-ion batteries that will power hybrid, plug-in hybrid, and electric cars. The fact of the matter is A123 also has sizable operations in the consumer (power tools) and industrial (power grid) sectors. Still, it is the promise of the electric car market that has investors salivating.
  • Right now, the lithium-ion auto battery market totals about $31.9 million according to the A123 prospectus. By 2015 it's projected to explode to $21.8 Billion and by 2020 it could top $74 billion. In layman's terms, it will be huge.
  • A123 is poised to get a good chunk of that business, along with other battery makers like LG Chem out of South Korea.
  • That said, there are critics who see A123 and the other electric car-related stocks as a repeat of the hype that surrounded ethanol-related stocks a few years back. The naysayer’s believe investors are buying into the battery stocks expecting electric cars to boom in popularity, when they may be a dud if gas prices remain low.
  • I agree that relatively low gas prices in the U.S. will dampen enthusiasm for the first wave of electric cars to hit showrooms here, but what about overseas? In Europe and Asia -- where taxes make a gallon of petrol more expensive -- that fact, along with tax incentives to spur the purchase of electric cars, could make those markets more attractive when the first generation of battery powered cars come out.
No position

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