I must admit it, upon seeing Tuesday's news for A123 Systems (AONE), I was tempted to buy some stock.
This happened because I know batteries have quite a few trends going for them. From the obvious need for Hybrid autos, to the emerging market for all-electric cars such as the Nissan Leaf and Tesla Motors's (TSLA) Model S and Roadster, to more mundane tasks such as substituting the traditional starter lead batteries for lighter, more durable, Li-ion units (precisely what the news were about). The increased demand for batteries is a given.
So, upon seeing those news I almost jumped the gun and bought blindly. Almost. But then I fired up the browser and took a look at the latest 10-Q. And this, among other things, was what I saw:
(Click to enlarge)
And this is where my enthusiasm faded away. Now, don't get me wrong, I am as willing as the next guy to forgive losses, even large losses, in a company that's just getting off the ground, and will sell into this huge expanding market with their own technology, etc, etc. But negative gross margins? And even worse, negative gross margins getting more negative over time? AONE is simply selling the product below cost! I mean, the 10-Q gives some explanation, with the company saying that once it hits larger volumes it might get better procurement terms for materials, the factories can get more efficient, the utilization rates can go up. But deeply negative gross margins? A good business is usually predicated on barriers to entry and good margins to boot. Sure, it can have losses that will only disappear with scale, but usually the margins are visible in spite of those losses. Not so here.
I had in the past considered speculating in Valence Technology (VLNC) because of the same trend and technology - after all they were the suppliers to Segway, a concept that, if sold for 1/3rd the price or so could well catch on. (Why don't they make those in China?) And there too, I quit before dipping my toe for the same reasons.
It just saddens me to see a very obvious trend and, up till now, no way to take advantage of it. If someone sees any way, we could brainstorm it in the comments. However, always bear in mind that the objective of an investor should always be profits, there has to be some kind of visibility into those.
Finally, I'm not saying that these stocks can't be speculated, even speculated wildly. The trend favoring batteries is so strong that sure enough, they should be monitored for any change in fundamentals that might bring strongly improved margins.