Alternative Energy Storage: Cheap Will Beat Cool

by: John Petersen

I’m a Mac user and have been for over 19 years. More accurately, I’m a serial early adopter of new technology. I bought Sharp’s first portable calculator in 1971; bought word processing, laser printing, videotape, compact disks and satellite TV in the early ‘80s; bought a cell phone and established an Internet domain in the early ‘90s; and had established a paperless office and a global practice by the late ‘90s. If it was new and cutting edge, I had to have it first regardless of the cost. So far, the only technical temptations I’ve been able to resist are an iPhone, because I don’t want that much connectivity, and an EV, because I don’t believe the available products are good enough. But I can pretty much guarantee that I’ll have an EV within a couple years, or as soon as somebody comes up with a reasonable solution that fits my relatively modest transportation needs.

I am not what most people would classify as a regular guy. But I have to admit that my perverse insistence on being an early adopter of the latest and best in cutting edge technology has more often than not led to product purchases and investment choices that ranged from disastrous to merely suboptimal.

My first portable calculator was a Sharp LE-8, a 1.6-pound four-function marvel that cost me about $350 and came close to costing me a wife. Within a couple years, it was a dinosaur that I replaced with an HP business calculator that did far more and cost about $250 less. The experience taught me nothing.

My first videotape was Betamax, a Sony product that was superior to but more expensive than the VHS alternative. Within a couple years after I bought the best technology the mass market chose the cheapest technology. It wasn’t long before Beta format tapes were hard to come by and after a few years I had to accept the fact that cheaper had beaten better. So I jettisoned my Betamax and joined the VHS world until DVD came along.

My first word processor was Xerox 860 system that cost about $14,000 in 1980. It offered a touch pad pointing device, full-page document views and the only black and white WYSIWYG display in the industry. It is my understanding that the Xerox (NYSE:XRX) 860 was a big part of the inspiration for subsequent innovations by Apple, but those details are ancient history. I gave up my Xerox 860 when I changed jobs, but missed it for years.

I almost had a comparable experience with Apple (NASDAQ:AAPL), which has always offered a superior operating system for professionals who simply want a complete set of tools that works. I moved from the PC world to the Mac world in September 1989 because I represented an authorized Mac software developer in connection with its IPO and was able to buy a top-end system at developer prices. But despite the technical superiority of the Apple products, the mass market chose the cheaper Microsoft (NASDAQ:MSFT) - Intel (NASDAQ:INTC) alternative.

Within a few years, Mac programs were hard to come by and were it not for software support from Microsoft and a huge bailout investment from Bill Gates in 1996, Apple might well have failed. Now that Steve Jobs is back at the helm and the price discrepancies between high end products have largely evaporated, Apple is able to command a modest premium for ultra-cool. But it clearly understands that the cool premium must remain modest or the mass market will go to the cheaper alternative.

Since September of 1989, both Microsoft and Apple have become huge and highly successful companies. But the following table provides an instructive glimpse of how a $10,000 investment in each of these companies would have fared over the 19 years that I’ve been a devoted Mac user.

Microsoft Corporation
Apple Computer
September 1989
September 1994
September 1999
September 2004
September 2008

The point of all this history is that a 1989 investment in the best available computer technology would have been far less rewarding than an investment in the best affordable computer technology. So the question for today’s energy sector investors is, “Do you honestly believe it will be different this time around?”

For several months I’ve been writing about a fundamental analytical disconnect in the energy storage sector. My earlier articles have focused primarily on macro developments in the energy storage sector how various classes of storage technologies have developed in the past and are expected to develop in the future. Now that most of the November SEC filings are available and we have current data for all of the battery producers and developers except China BAK (NASDAQ:CBAK), it may be helpful to compare how the various companies stack up based on the numbers they’ve just filed with the SEC. To enhance comparability, sales and pre-tax operating income have been annualized based on reported year-to-date results and all amounts other than share prices are expressed in thousands.

(Click to enlarge)

Though sorely tempted, I will resist an almost overwhelming urge to comment on individual companies in the Cool Chemistry group other than to observe that ULBI, OTCPK:ABAT and HPJ are far more financially stable and reasonably priced than some of their gravity-defying peers. I will point out, however, that the Cool Chemistry group has only a small fraction of the assets, equity and annualized sales of the Cheap Chemistry group but it carries a combined market capitalization that is 2.25 times greater.

Frankly, I have a hard time understanding how any rational investor could believe that the valuation disparity between the Cool Chemistry group and the Cheap Chemistry group is justifiable under any reasonable growth scenario. Best affordable technology always wins out over best available technology. It’s been that way since the dawn of time and it won’t be any different over the next few years as annual revenues in the energy storage sector soar from $30 billion to $100 billion. Every company in the energy storage sector will likely see tremendous growth, but it will take a very long time for growth in the Cool Chemistry group to justify current market premiums.

Mark Twain quipped, “History doesn’t repeat itself, but it does rhyme.” Henry Ford didn’t make the best cars; he just made the cheapest cars. Microsoft didn’t make the best operating system; it just made the cheapest operating system. Xerox invented and then failed to commercialize more cool technologies than I can even begin to recount. Additional examples of the fundamental economic reality that price always trumps cool are far too numerous to mention.

When you cut through the alternative energy hype and drill down to business fundamentals, I have to believe that investors who want Microsoft class performance in the energy storage sector should be investing in the Cheap Chemistry group.

Disclosure: Author holds a long position in Axion Power International (NASDAQ:AXPW) and is a former director of that company.

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