The investment banking team at MDB Capital is on a roll. MDB has brought four companies public over the past two years: Clearsign Combusion (NASDAQ:CLIR), which is up ~80% since I wrote about it on SeekingAlpha in November 2012 following its April '12 IPO at $4/share, Ideal Power (NASDAQ:IPWR) in November 2013 @ $5/share, Energous Corp. (NASDAQ:WATT) in March at $6/share, and most recently Resonant (NASDAQ:RESN), which IPO'd at $6/share on May 29. All four companies are healthily above their offering prices. Energous which has mindbogglingly-cool technology that enables wireless charging of mobile phones, tablets and other electronic devices -- imagine walking into your kitchen, a Starbucks or an airport waiting area and your phone automatically starts charging -- is the hottest of the bunch thus far. IPWR, however, is my dark-horse candidate to be the top performer over the next 12-18 months. In the spirit of full disclosure, I am long all four of the aforementioned stocks.
Founded in 2007, Spicewood, Texas-based Ideal Power develops and sells power converter solutions for commercial and industrial grid storage, electric vehicle charging, and photovoltaic ("PV") generation. It is the furthest along, commercially, of MDB's "public venture capital" portfolio companies, and deserves investor attention at the current price levels, which are roughly 40% off of the highs set back in March. Recent weakness stemming from the lock-up expiration for pre-IPO investors in late May has created a buying opportunity for dollars allocated for "aggressive" investments.
Ideal Power has 19 issued U.S. patents and one issued Chinese patent, and "expect(s) to file a significant number of additional patent applications as our technology matures," according to its 10-K filed on March 28, 2014. The Company already has numerous additional pending U.S., foreign and international patent applications, and "the pending foreign and international patent applications, barring unforeseen problems, are expected to provide patent protection in additional countries including the European Union, China, India, Korea, Malaysia, the Philippines, Singapore and Brazil."
Converters and Inverters Explained
Electronic power converters change the form of electrical energy to optimize generation, distribution, consumption or storage. This conversion may include changing between Direct Current ("DC") and Alternating Current ("AC") or changing the voltage and current.
Most power converters in use today are based on old technology that requires the use of heavy magnetic components. However, the change in sources and uses of energy is driving a need for new energy infrastructure. In particular, renewable energy sources such as solar and wind are driving the need for technological innovation. According to Ideal Power's 10-K, renewables...
create a need for energy storage to reduce the detrimental effect to the grid from the intermittency of renewable energy generation. Distributed power conversion plays a central role in this new infrastructure. Inverters are used to convert DC power from renewable solar and wind generators to AC power. Bi-directional inverters/chargers are needed for large-scale battery storage and fast EV charging. Power conversion for distributed grid energy storage can also improve grid power resiliency and create remote micro-grids to bring distributed power systems to remote communities without power grids. In short, power converters play a crucial role in ensuring the most efficient form of power is available across the electricity spectrum from generation through distribution to storage and ultimately consumption.
Products and Business Model
Ideal Power currently offers two products: a 30kW inverter for the photovoltaic market and a 30kW battery converter for the distributed grid energy storage market. Ideal Power intends to offer two additional products in the near future: a hybrid converter, which will combine the functionality of the photovoltaic inverter and the battery converter, and a microgrid converter, which will add off-grid functionality to the hybrid converter.
The Company announced on June 9 that it had won an award for its 30 kW Hybrid PV Storage Converter during a ceremony at Intersolar Europe in Munich, Germany, the world's largest exhibition for the solar industry. It will present additional information on its award-winning product at Intersolar North America, July 7-9, in San Francisco.
Ideal Power is focused on licensing its proprietary power conversion Power Packet Switching Architecture ("PPSA"), a universal power conversion technology, to original equipment manufacturers; however, it is initially selling manufactured products as a prelude to the more scalable and cost-efficient business model of licensing its technology to OEMs.
Power Packet Switching ArchitectureTM ("PPSA")
As explained in the 10-K, "PPSA is a new universal power conversion technology intended to improve upon current power conversion technology in key product metrics, such as weight, size, cost, efficiency and flexibility." The 10-K further explains that what is novel about this approach is that with PPSA:
power flows through and is temporarily stored in an AC link magnetic storage component. This power packet switching is the heart of our technology. After the AC link is charged, it is disconnected from both input and output, providing isolation without a transformer. … Traditional inverter technology uses several magnetic components and capacitors that are heavy and expensive, have custom hardware for fixed functions that are inflexible and costly, and have high electrical and thermal stresses that significantly increase failure rates and reduce efficiency. Our technology eliminates the majority of the passive components of traditional power converters, including transformers, inductors and capacitors. PPSA technology can provide isolated power conversion in a single device, which provides clear advantages over traditional technologies.
Weight, for example, is an area in which Ideal Power absolutely crushes its competition. PPSA architecture reduces weight by eliminating passive components such as transformers, inductors and bulk capacitors. Its 30kW PV inverter weighs 97 pounds compared to competing 30kW PV inverters with transformers which weigh upwards of 1,200 pounds, and transformer-less inverters, which do not provide isolation, weigh ~170 lbs. Reduced weight results in lower manufacturing costs, and lighter-weight components save end customers on transportation and installation costs.
Inverter efficiency is another competitive advantage of PPSA. Efficiency measures the amount of power out of the inverter as a percentage of the power into the inverter. Therefore, high efficiency PV inverters use less power in the conversion process and supply more power for use. In tests conducted by the California Energy Commission ("CEC"), IPWR's 30kW PV inverter efficiency was 96.5%, which was one of the highest PV inverter efficiencies for approved PV inverters. Additionally, IPWR's battery converter has achieved efficiencies of over 96%, which is superior to competing systems.
Ideal Power is focusing its business in three multi-billion dollar target markets:
- Photovoltaic Inverter Market - The U.S. Energy Information Administration forecasts solar capacity to grow by more than 1000% from 2011 to 2040, which would represent an increase in power production of 46GW. Industry analysts estimated the global PV inverter market at approximately $7.1 billion in 2012. Analysts also forecast significant growth in the installed base of PV inverters, from 30GW in 2012 to over 58GW in 2017, representing a CAGR of 13.8%. Solar installations are growing rapidly due to a combination of falling system prices, government subsidies, and an increase in environmental consciousness. As noted above, Ideal Power's 30kW PV inverter is much lighter in weight and smaller in size than its competitors (it weighs 97 pounds compared to about 1,200 pounds for typical PV inverters that provide comparable electrical isolation).
- Distributed Grid Energy Storage Market - With renewable energy sources, power is not necessarily produced when customers need it. PV only produces energy when the sun is shining, and wind turbines only work when the wind is blowing. As a result, customers who are unable to use the power produced at those times have to store the bower on batteries, or it goes to waste. In the U.S., a major driver of energy-storage adoption is the reduction of utility demand charges. "Peak demand" charges are expensive and can account for a sizable portion of electricity bills for commercial and industrial customers. Therefore, commercial buildings, for example, will likely find it financially advantageous to reduce peak loads in order to limit peak demand charges, which can be accomplished by the installation of energy storage systems. According to Ideal Power's 10-K, "The Americas are predicted to remain the largest market for energy storage in grid-connected commercial PV systems over the next five years, increasing from an estimated 1.4MW of PV systems with installed storage in 2012 to 900MW in 2017, a CAGR of 264%. The California grid operator has issued a mandate for over 1GW of new energy storage to be installed by 2020, and we believe other states and countries will increasingly consider grid storage to firm intermittent renewables and improve grid resiliency."
- DC Charging Market - The Electric Vehicle market is booming. Consumers have a greater selection of EVs including both plug-in hybrid electric vehicles such as the Chevy Volt, Cadillac ELR, Honda Accord PHEV, Porsche Panamera S-E Hybrid, and Toyota Prius, and fully electric vehicles such as Tesla's (NASDAQ:TSLA) Model S, the BMW i3 and i8, Fiat 500e, Ford Focus Electric, Ford Fusion Energi, Chevy Spark, Honda Fit EV, Nissan Leaf, and Smart electric drive. A major limitation of EVs is their limited driving range on batteries and the recharging time to juice up. EVs have on-board chargers that convert the low voltage AC power in a home to the DC power needed for charging EV batteries. These small, lightweight chargers often require up to eight hours for a full charge. A DC charger or "fast charger" contains a high-powered charger located outside the car. This "off-board charger" has the potential to fully charge a car in 30-60 minutes. As the EV market expands, Ideal Power, with its PPSA-enabled 30KW battery charger, is very well positioned to get market share. From the 10-K:
"We are currently developing a 30kW 3-port hybrid converter for this market. We expect this to be our first product to exploit the single-stage multi-port capabilities of our technology. We are designing this product to include two DC ports and one AC grid port that will combine the capabilities of our existing PV inverter and battery converter. We believe, if the product performs as planned, it would perform at lower cost and higher efficiency than other hybrid converters."
Vehicle-to-Grid (V2G) Technology
On May 8, Ideal Power announced that the Company "had received a purchase order for ten of its PPSA-enabled 30 kW battery converters from Coritech Services, a provider of custom engineering solutions for a variety of applications including electric vehicle charging. Coritech intends to install the battery converters in its bi-directional electric vehicle charging system for use in Vehicle-to-Grid (V2G) applications for the Department of Defense (DOD). V2G technology allows electrified vehicles to supply power to the local grid to improve the energy independency and grid resiliency of commercial and government installations."
Following this announcement, Forbes.com published a must-read article, "Ideal Power: Some Day, An Electric School Bus May Save You From A Blackout." Peter Kelly-Detwiler wrote:
V2G technology is likely to become a big deal in the years to come. Research firm Navigant estimates as many as a quarter million V2G-enabled EVs will be sold globally between now and 2020. That makes sense, as the mobile storage technology would otherwise be left idle for most of the day. Attached to the grid as storage, it can create another value stream.
In the article, Ideal Power's President and Chief Commercial Officer, Paul Bundschuh, said:
We see there are two unmet needs in EV infrastructure. The first is infrastructure for fast-charging EVs. Here the goal is to reduce installation and operating costs, and solve problems where people might not have overnight AC charging, and need fast DC charging for range extension. The other major need driven by the Department of Defense (less looked at by industry) is for commercial EV fleets, such as trucks and buses used locally. These vehicles would have larger battery sizes than personal EVs. Therefore, higher power DC charging might be much more common. Also both EVs and DC chargers will be owned by the same entity and therefore have more control to create more value.
The DoD sees the opportunity to use vehicle batteries not only for transportation but also as grid storage value. They have been looking at this aggressively for several years and are helping to start the entire industry, similar to what they previously did for commercial jet engines, nuclear power, GPS and even the internet. We were not involved in the first generation of this technology with the SPIDERS project at Fort Carson, Colorado. Our partner Coritech was deeply involved in SPIDERS and to get efficiencies and costs for this technology to scale, they brought us in.
According to Bundschuh, if the economics can be proven, this approach could be leveraged to non-tactical fleet applications, as well as to other government agencies, which could have interesting implications for the power grid. Bundschuh commented:
I think that's where the industry is going - efficiency, reliability and resiliency. For example, what if we took school buses and electrified them? There are half a million school buses in the U.S. They typically make two 25-mile loops in stop and start traffic. You wouldn't need a large battery to do that if you electrified them. You could use an 80 kWh battery in a bus. If a grid operator had access to 50,000 EV school buses each with a 50-KW bi-directional charger, that's 2.5 GW of capacity that could be used as a peaker, available all summer long when most school buses are not used. This capacity provides flexibility to support peak summer loads as well as integrate more low cost intermittent wind and solar generation. The same opportunity exists for local delivery trucks.
Early Customers and Partners
Early development relationships include Lockheed Martin Corporation (NYSE:LMT), the U.S. Department of Energy -- more than a dozen projects using Ideal Power's converters are profiled on the DoE's energy storage website, according to the Forbes.com article -- and the National Renewable Energy Laboratory. Additionally, according to the 10-K, Ideal has sold products to customers in Arizona, California, Colorado, Michigan, New Jersey, Ohio, Oregon, Texas, Washington and Wisconsin, and have made commercial sales to Coritech Services, Sharp, Powin Energy, Green Charge Networks, the U.S. Navy, and others.
In his May 6 research report initiating coverage on IPWR, Northland Capital Markets analyst Colin Rusch wrote,
We believe that as a technology leader, IPWR has an opportunity to capture 20%+ of its addressable market over the next 5 years. Assuming 2GW of installations in that time frame and 25%-30% price declines, we believe IPWR would achieve at least $120M in revenue. We expect the company can achieve an annual run-rate of $60M by the end of that time frame in 2019, or ~200-240MW of annual sales.
Northland has an "outperform" rating on IPWR stock and a conservative, $15 price target as Rusch wrote, "Given its differentiated IP position, which is leading to multiple platforms standardizing products on its IP, we see IPWR winning an outsized market share in energy storage applications for commercial and industrial buildings."
According to the Company's first quarter report filed with the SEC on May 14, Ideal had 7,010,959 shares issued along with warrants to purchase 1,623,824 shares at a weighted average exercise price of $4.45/share and 776,839 stock options with a weighted average exercise price of $5.34/share. Assuming all options and warrants are exercised, the fully-diluted share count is 9,411,622.
Ideal Power is spending a lot of money on the proliferation of its Intellectual Property and will likely lose money operationally for several years. However, it has sufficient resources to cover over two years of cash burn. Other risks associated with this investment include 1) the relatively slow sales cycles of its target markets and speed at which its customers order its product; 2) increased competition and margin pressure; 3) technology development risk; and 4) the energy storage markets' current dependence on government subsidies to spur sales, as the cost of energy storage currently exceeds retail electric rates.
In summarizing Ideal Power and its future opportunities, Bundschuh told Forbes.com's Kelly-Detwiler,
Ideal Power not only has a great technology, but we have been clever in understanding about where you can maximize the value of expensive battery assets. Our strategy is to create modular power converter building blocks and service the companies that will be integrating and installing them to create new cost-effective power systems.
The demand for energy storage is growing rapidly, and Ideal Power is poised to become a category leader because of its breakthrough PPSA technology, which dramatically improves upon current power conversion technology across key metrics including weight, size, cost, efficiency and flexibility. The Company has a very strong Intellectual Property portfolio with 19 issued U.S. patents, one Chinese patent, and pending U.S., foreign and international patents providing protection in large markets around the world. Ideal Power is initially selling manufactured products, but intends to focus on licensing its technology to OEMs. It is currently focusing on three market segments: Photovoltaic Inverters, Distributed Grid Energy Storage, and DC Charging for Electric Vehicles. Aggressive investors should use the recent weakness caused by lock-up expiration for pre-IPO investors as a buying opportunity.
Disclosure: I am long IPWR, CLIR, WATT, RESN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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