John Petersen

A123 vs. BYD and Other Irrational Battery Investments

Renim, I'll struggle to contain my excitement until the articles stop using words like 'mulls,' 'considering,' 'possibility,' 'feasibility' and 'concept.' Currently it's all fairy dust and optimistic plans to sell a product that will cost twice as much; offer a mere fraction of the flexibility, comfort and convenience; not make a whit of economic sense until oil prices attain levels that are not reasonably expected for 10 years; and not make a significant contribution to either energy independence or CO2 emissions. The politicians always love these grandiose ideas and consumers invariably hate them.

Get back to me when EV sales in the U.S. top 100,000 units per year. Washington may not understand the difference between $20,000 and $40,000, but I'll guarantee that budget stressed consumers do.

A123 vs. BYD and Other Irrational Battery Investments

Doug, I thought you'd enjoy a headline and link that another reader sent me this morning:

"Lithium-Ion Batteries Could be Too Expensive, MIT Team Says"

industry.bnet.com/auto.../

A123 vs. BYD and Other Irrational Battery Investments

marketquant, I don't know enough to agree or disagree with your assertions on the principal uses for the A123 and Altair devices, but one of the biggest issues that the thought leaders are grappling with right now is how to aggregate benefits from multiple value streams and arrive at a comprehensive and intelligible value model that can be worked into a utility's rate base. All of the current testing of battery systems is focused on relatively small high value niche markets like FR and spinning reserves. As numbers viewed in a vacuum, these niche markets seem pretty attractive. In the context of the overall grid storage market, they're less than a drop in the bucket. There is a new report working its way through the publication process at Sandia that will update the 2004 graph I've published in several articles. When the report is released, I'll have more to say.

tireman63, I'm with you 100% on the time-to-profitability issues. I still buy green bananas, but I don't want to start from scratch and clear a new plantation from the jungle. As a result, I generally use a very high discount factor for markets that are subject to substantial uncertainty and won't be profitable for another decade. The investor in me is far more interested in markets that will experience outsized growth and profitability over the next three to five years.

A123 vs. BYD and Other Irrational Battery Investments

Marketquant, I'm not enough of a technophile to draw fine distinctions like the one you're describing, but A123's prospectus disclosure says:

"Our products provide standby reserve capacity, by delivering power quickly in order to offset supply shortages caused by generator or transmission outages, and frequency regulation, by regulating the minute-to-minute frequency fluctuations in the grid that are caused by changes in supply and demand. The first of the AES systems, a two megawatt system housed in a 53-foot trailer, is installed at an AES facility, and we have shipped additional units for AES, totaling 16 megawatts."

So it certainly appears that A123 and Altair are competing head-to-head for the same customers and A123 has the lead in shipments by a pretty wide margin.

A123 vs. BYD and Other Irrational Battery Investments

Jack, I've blocked the date on my calendar and would love to join you in Washington DC.

MRTTF, while translating SAFT's financial statements is a major pain because everything is stated in Euros, it trades at 3.8x book value, 1.1x sales, and 14.6x net income.

A123 vs. BYD and Other Irrational Battery Investments

Freya and Grey Road, amen.

A123 vs. BYD and Other Irrational Battery Investments

Freya, the biggest market losses I've ever taken came from my failures to separate emotion and optimism from financial facts. I understand all too well that we're going to need every storage technology that exists and many that haven't even been invented yet. So when I'm looking at a sector that has effectively unlimited growth potential across the board, it's fairly easy to predict that the biggest upside potential is found in the stocks that are beaten down in price. I'll take a $50 million market cap with a $1 billion revenue potential over a $200 billion market cap with a $1 billion revenue potential any day of the week. I'll also take a $500 million short term revenue potential over $1 billion revenue potential a decade out. The goal is simple, buy them when they're undervalued and sell them when they're overvalued and don't fall in love with an idea.

While there isn't any one technology that will get a definitive nod from any administration, bureaucrats are as subject to PR hype as the rest of us. The fact that many of them are ideologues that have never worked for companies that had to produce something and make a profit in the process can complicate the issue. When you add a presumption that resources will be as available in the future as they have been in the past, you can get some pretty unreasonable policy initiatives (think fuel cells and ethanol). I also can't discount the importance of having an ear in high places, although I can think of any number of places where the ear listened politely and still said no.

A123 vs. BYD and Other Irrational Battery Investments

Mayascribe, one of my commenters on altenergystocks referred to hopium, a highly addictive drug that can destroy portfolio values in the blink of an eye. While the symptoms are very common among investors, they're even more common among plug-in evangelists who insist on arguing that all opinions, experiences and visions of the future that don't match theirs are wrong. A careful reader will note that I've decided that it's easier to just let them have their say and refrain from engaging in endless and fruitless debate.

A123 vs. BYD and Other Irrational Battery Investments

purestock, BYD is a fine company and I expect them to become a major force in China, but being a fine company does not necessarily mean investors will profit. Every stock has three values: under valued (which is what BYD was when Buffet bought at $1.02), fairly valued, and overvalued (which is what I think BYD is after a 900% run in its market price). Paying 2x or maybe even 3x the Buffet price leaves plenty of room on the upside. Paying 10x is a sure recipe for short term disaster. Over the long term, BYD may well grow into its current market capitalization - but it's not worth $11 per share today.

MRTTF, on June 30, 2009, before the big push for the IPO really got up and rolling, A123 was carrying $4.85 million on it's balance sheet for "deferred offering costs," which is what you call the amount you've spent on an in-process IPO. Their last amendment prior to the effective date estimated the total IPO costs at $6.8 million, including $3.4 million in accounting and $1.9 million in legal. It's neither good nor bad, but it is dreadful expensive.

Advill, the funds and technical companies invested in A123 over the last couple of years and they paid something less than $9 per share. The IPO which was priced at $13.50 put the rest of the money on A123's balance sheet. Now that the offering is done, the company has nothing to do with the daily trading activity and it's all a new investor buying stock from an old investor.

Whenever a company like Ener1, Valence or for that matter Axion goes to the market for additional capital, the new investors take a very hard look at what the current values are and then negotiate a price based on their perception of those values. In a market like the one we have right now, those negotiations are bare knuckle affairs where the company that needs money is at a distinct disadvantage to the investor who has money. That disadvantage is particularly acute when the spread between financial statement values and market capitalization is measured in hundreds of millions of dollars.

A123 vs. BYD and Other Irrational Battery Investments

By the time any company makes it to the first tier investment banks for an IPO, the bulk of the money invariably came from VCs and corporate funders. That's just the way of the world. Back when I was a baby lawyer, a small company could go out and do a small IPO and raise $3 to $5 million. Anymore that's the preliminary budget for legal and accounting fees. It's a shame because there are lots of small companies that could reasonably justify an $18 to $25 million IPO that will never get a chance.

A123 vs. BYD and Other Irrational Battery Investments

GE was a big pre-IPO investor in A123, but by no means the only one. Other notables included North Bridge Ventures, Qualcomm, Motorola, Morgan Stanley Emerging Markets, Sequoia Capital Anchorage Capital and AllianceBernstein Venture Fund.

A123 vs. BYD and Other Irrational Battery Investments

Freya, ALTI has put out a couple MW of demonstration units that offer about 15 minutes of frequency regulation. A123 has done the same thing but on a much larger scale. AES is the contracting party for both companies. Since each PHEV or EV will use the energy equivalent of a second house (16 to 24 kWh per day) I'm not anywhere near as sanguine as many about the supply side. Moreover, while people may do their base charge at night, all of the demand from a nationwide network of charging stations will come during the day when folks are out, about and worried about having that little margin of safety for the drive home.

So far, the only battery maker that has demonstrated the long-term cost effectiveness of battery backed renewable energy is Exide. Others have started tests, but it will be years before anybody can prepare a spreadsheet that isn't 75% assumptions.

A123 vs. BYD and Other Irrational Battery Investments

I set this article up as a contrast between A123 on the one hand and Ener1 and Valence on the other because A123 at least has the resources to execute on its business plan; resources that give it at least a couple years of working capital running room. Ener1 and Valence have already drained their tanks and are running on financial fumes. Without a huge slug of new financing Ener1 won't get its ARRA grant or have the ability to stock inventories, pay start-up costs for its idle factories (assuming that's all that's needed) and carry accounts receivable from customers. Likewise, Valence is struggling along from hand to mouth and hoping for the best.

Retail investors and dribble-out pipe purchasers may be willing to pay something close to current market prices based on hype and limited financial exposure, but I worry about the price professional investors will be willing to pay for millions of shares based on business fundamentals. Retail stockholders better pray that Ener1 and Valence have access to kinder and gentler financing sources than the ones I've dealt with for the last 30 years.

A123 vs. BYD and Other Irrational Battery Investments

Zenfar, the Internet was developed by DARPA to help research scientists communicate and collaborate. All the ancillary uses that have arisen since it was first opened to the public have been pure serendipity. In the case of the Internet, almost all of the benefits have been the unintended consequence of unrestrained innovation. I can pretty much guarantee that the Internet we have today would not exist if it's design and function had come from a central planning office in DC.

Noapplefanboy, I've only been following Valence for 18 months or so and I don't have a lot of long-term knowledge about its historic financing patterns. Thanks for the clarification. I'm no fan of "life support" financing that doesn't leave room for planning, growth and expansion. Sometimes it's better to just pull the plug on grandma's ventilator.

Jeffrey, it's always nice to hear from another SA contributor. Your article was a very good piece and it's a shame it wasn't published. We're in a frothy time right now where the politicians have decided that PHEVs and EVs are good for America and that lithium-ion batteries are the answer. The lithium-ion developers have chimed in and said "sure, we can do that if you give us enough money" and the automakers have capitulated and agreed to introduce products, but are beset by nagging worries about whether a market will develop. The one voice that has not been heard is the only one that matters - the voice of the consumer. Actually it has been heard, but everybody ignores the studies that consistently say the only sure buyers for PHEVs and EVs are the emotionally committed and the mathematically challenged.

HEVs make a huge amount of sense because they're proven performers that carry relatively small price premiums and save up to 50% on fuel costs. As soon as you add the plug, the price premium soars into the 100% range, customer comfort and convenience all but disappear and the overall usefulness of the product plummets. Until gas prices climb into double digits, it will be very difficult for budget conscious consumers to justify the cost.

There will be lots of flashy product introductions and there will no doubt be an initial sales surge, but once the hype and excitement dies down and the consumer grapevine starts talking about the real life owner experience with EVs, I'm convinced the overwhelming majority of consumers will say "give me the HEV" because it's the clear winner in comfort, safety, flexibility and fuel economy.

MRTTF, once again, thanks for taking the time to read and comment on technical issues that are far beyond my meager capacity to explain.

A123 vs. BYD and Other Irrational Battery Investments

Franklin76 and Zenfar, I agree wholeheartedly that the dearth of early stage capital is doing a great deal of harm to the innovation process. I too would prefer a situation where the government creates a challenge, puts up an attractive prize and gets the hell out of the way. The last thing the government got right was Kennedy's drive for a man on the moon where the only thing that counted was tangible results. Everything since then has been built on shifting political sands and the latest round of eco-correct thought that never bothers to consider the laws of unintended consequences. So instead of a coherent policy we have a "technology du jour." First it was fuel cells, then it was ethanol, today it's EVs running on lithium-ion batteries which even the DOE says are not ready for prime time. What will it be next year?

I got a great comment on this article on Altenergystocks.com that said in part:

"These results demonstrate the devastating effect of the drug on which many investors are hooked...hopium. Ah, the financials may look bad, but imagine if the technology wins....

Although some of these companies may be reorganized in the next two years, overall share price rationalization will likely take longer. Until it is clear to the investment market how the battery market will be structured, who the winners will be, such wild pricing is to be expected.

In the interim it will be interesting to see whether the large incumbent manufacturers, e.g. Exide, can re-invent themselves. Most companies that ignore new technology too long die or waste away. Consider Polaroid, Univac, Woolworth. In contrast, IBM and Apple were successful turnarounds. GE is a work in process but will likely succeed."

jjp, if you're a trader and keep an eagle eye on the market, BYD may present some great opportunities. My only reservation is the buy and hold type investor who drops things into an account for a couple years and then checks to see how he did. I know the rules are different for Chinese stocks, but am also aware of Khosla's law of economic gravity. I'm glad to hear that you were able to hitch a ride on the rocket during it's upswing.