Yesterday I mentioned some of this week's IPOs. While the mortgage IPOs are floundering today, lithium-ion battery maker A123 (AONE) is up 43% from its offering price this morning of $13.50. Keep in mind that the offer price was initially going to be between $8-9.50, then $10-11.50, and finally boosted to $13.50 - and the amount of shares offered was boosted by over 10%. There was huge demand among investors for a piece of this action.
From the S-1, the company is nowhere near profitable - note that cost of goods sold exceeds goods sold!
How much should this thing trade for, considering there's no profits? According to the filing, there's about 96 million shares outstanding, pegging the company's value at $1.92 billion, or 27 times this year's $70 million in expected sales (It's closer to $1.5 billion if we exclude yet-to-be exercised options). Total insanity, unless you buy into management's estimates of future sales:
According to A.T. Kearney, the global lithium-ion battery market for automotive application in HEVs, PHEVs, and EVs is estimated to be $31.9 million in 2009. A.T. Kearney projects that this market will grow to approximately $21.8 billion by 2015 and $74.1 billion by 2020.
If A123 takes 20% market share of the estimated $22 billion in 2015 revenue, that could mean $4.4 billion in sales for the firm. A price-to-sales of 2 (not warranted, but they'll get it due to investor mania over "green" anything) would lead to a market value of $9 billion, or 373% higher than where we're at now.
And how does the company get there? By government-mandate of course!
"Based on a moderate drive for change influenced by increasing governmental regulation, emerging powertrain technology, changing consumer demand and OEM product strategies toward more fuel efficient vehicles."
The projection from A.T. Kearney for an increase in the lithium-ion market of 68,000% percent by 2015 is pretty ridiculous. Buyer beware.
The most entertaining aspect of this story will be the initiation reports by the investment banks that participated in the IPO. Expect lots of "we weight the DCF valuation 10% and the peer valuation 90%" pie-in-the-sky nonsense.
Disclosure: No position