To me in order to justify investing in this stock A123 Systems (AONE), you have to be a gambler. I don’t like the stock for the following reasons:
- Branding doesn’t matter. This company is selling batteries to businesses. It’s not like a customer buying a Duracell battery because it is known to be performant and reliable. Businesses don’t care as much about branding when they choose suppliers for their components. They look at the technology and the performance to cost ratio, as well as the management within the company in question. If next month a company comes out with the capabilities to mass-produce batteries that are leaps and bounds better than A123′s, A123 becomes pretty much worthless. Playing a battery producer is simply too risky for this reason, as you can’t just bank on the possibility that it creates the next leap in technology. If you want to play the EV market or another battery-run sector, play the companies that make the machines themselves (example, Tesla (NASDAQ:TSLA) — see blog post). If a new battery technology comes out, a company like Tesla can simply change suppliers and quickly adapt to the movements in the market. It sells to customers, so its brand image, which is very good, is also very significant.
- No exit strategy, no plan-b. If developing batteries for its current target customers does not work out, this company is completely screwed. It has not secondary business that will drive it out of the hole that it’s already dug itself into. This is too risky for a careful investor.
- Supplier for products that are not selling. This is self-explanatory. A123 has signed deals with General Motors (NYSE:GM) and Chrysler, deals that it is depending on for success. GM’s EVs are terrible, and they are not selling well. This does not bode well for A123. Ask yourself: what products that may soon explode in sales and production does A123 supply to?
To me, the three reasons above are enough to completely dismiss an investment in A123. There are much better ways to play lithium-ion batteries. I don’t see many rational, non-speculative reasons to be bullish on this stock. Therefore I do not predict a “critical point”, or a turnaround, in the next couple of years.
Is there something you can add that will swing people to the other side of the argument? Comments are welcome below.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.