Ideal Power: A High-Risk, High-Reward Innovative Power Switch Play

Summary

• The company is developing a more efficient, bi-directional power switch technology based on their innovative B-TRAN technology.
• B-TRAN brings important advantages in terms of energy efficiency gains, reduced losses, bi-directionality and reduced bill of materials and heat production.
• B-TRAN is well protected by 65 patents and 23 pending patents.
• The company is engaged in developing power switches and circuit breakers to customer specification in an iterative process, producing increasing customer interest.
• Commercialization is at least a year away, but the company has cash to continue multiple years.
• Looking for a portfolio of ideas like this one? Members of SHU Growth Portfolio get exclusive access to our model portfolio. Learn More »

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We introduced Ideal Power (NASDAQ:IPWR) for our marketplace subscribers on July 23 this year and bought shares for the portfolio as the company has similarities with Aehr Test Systems (AEHR), a portfolio high conviction buy that has exploded nearly 10-fold since we advised to buy last year at $20.

Source: FinViz

The company offers a technology for power switches called B-TRAN that offers considerable advantages over existing ones. These advantages are important in some of the same high-growth markets and segments where Aehr operates in.

That is, should B-TRAN become widely adopted, it exposes the company to a similar ramp as we're now experiencing with Aehr although probably not with the same strength.

We're not there yet, as products are still in development and will be for quite some time, but the signs are rather positive at this stage.

We have described the B-TRAN technology in detail in our linked previous article so we're going to be brief here.

Source: Company IR presentation

Or, as it was summarized during the Q2CC:

Ideal Power on the cusp of realizing the potential of B-TRAN unique advantages bi-directional switching capability, lower switching and conduction losses, lower user costs and improved and more compact thermal management.

These advantages are important in a series of markets, with the benefit that these are growing at a fast pace.

Markets

• Data centers
• EVs
• EV charging
• Circuit breakers
• Renewable energy

The company also has two programs for government agencies:

• SDIR project, together with DTI (Diversified Technologies)
• NAVSEA, a US Navy program

A progress report follows as we covered the advantages in each of these markets in our previous article in some detail. The magnitude of the opportunities in front of the company can be gauged from the technology it aims to replace:

Source: Company IR presentation

Data centers

With energy cost as the biggest operating expense, any help in this department is likely to make a significant impact. Given the pressure for energy savings in this industry, it's no wonder that B-TRAN potentially has a bright future.

The main application is UPS or uninterrupted power supply systems, where B-TRAN-based switches deliver advantages like much faster UPS systems switching to battery backup in case of a power outage and energy efficiency gains (increasing UPS efficiency from 90% to 95%). UPS systems account for some 6% of data center total energy losses. From the Q2CC:

Replacing conventional power semiconductors in these systems with B-TRAN is expected to resolve and the substantial annual cost savings for data centers through reduced energy consumption and the ability to migrate to lower costs, less complex cooling systems. This will be a significant advancement for power switches and UPS systems. A market, which was approximately $0.5 billion in 2020 is forecast to grow at an estimated 6% compound annual growth rates through 2026.

There isn't much concrete progress to report for this market, the company is in talks for possible collaborations.

Automotive/EVs

EVs consist of the largest part of the $6B power switch market and it's also growing fast with the overall market expected to nearly double by 2026.

The company is working with a top-10 global automotive company (Q2CC):

whose advanced technology engineering team will test and evaluate B-TRAN and its driver for easy applications including the EV drive train, DC-to-DC power conversion, circuit protection, and other uses within the EV ecosystem.

This illustrates the multiple applications in the automotive space in general and EVs in particular as specifically with this potential customer (Q2CC):

B-TRAN is enabling new architectures and solutions to improve EV efficiency, range and performance by lowering total system size, cost and component count

EV charging

We have discussed the advantages that B-TRAN offers over conventional IGBT switches to EV charging, like greater efficiency, high directionality, smaller size, and reduced thermal management.

The company is working with a provider of EV chargers, for their innovative, portable and modular EV charging system in development, combining a DC fast charger with a swappable battery system. The modular design allows for scaling, targeting both on-demand fast charging and roadside assistance to eliminate charging anxiety.

Solid-state circuit breakers

These are mostly used in the grid, where DC breakers are advancing as a result of the wave of alternative energy and storage being connected to the grid, but AC breakers still constitute most of the market.

The latter are aging and 45% of medium-voltage AC breakers are most in need of an upgrade and it's where B-TRAN based breakers have their sweet spot. From the Q2CC:

In smarter bi-directional subsystems like solid state circuit breakers will be needed. This is why we believe the medium voltage class of AC circuit breakers will be the fastest growing segment in the circuit breaker market and it is where B-TRAN can bring the most value because low conduction losses and fast switching times.

The company has two government programs in conjunction with DTI (Diversified Technologies). The NAVSEA program is a US Navy program for ship electrification. From the Q2CC:

A project with DTI for NAVSEA is intended to develop and demonstrate a B-TRAN enabled high efficiency 12 kilovolt medium voltage direct current circuit breaker for the US Navy. The subsequent objective of introducing a family of medium voltage DC circuit breaker products incorporating B-TRANs for sale to military, industrial and utility markets.

The design process is iterative with wafer runs by their fab partner Teledyne (the company is also in the process of certifying a second fab partner) and by mid-2022 the company will deliver an optimized power switch for using the full-scale demonstration of a 12-kilovolt breaker.

The other government program is with SDIR, the phase 1 goal is to deliver a low loss B-TRAN module that can be incorporated into a 13.8 kilovolt alternating current solid-state circuit breaker in phase 2.

Market opportunity

These segments taken together add up, and they're growing at a decent rate:

• Data centers provide a $500M IGBT market growing at a CAGR of 6%
• Alternative energy provides a $1.1B IGBT market growing at a CAGR of 12%
• EH/HEV provides a $1.5B IGBT market growing at a CAGR of 15%
• Circuit breakers provide a $26B market by 2027 growing at a CAGR of 6%

EVs constitute the largest segment in the $6B power switch market, which is expected to nearly double by 2026. And EV charging stations (Q2CC):

EV charging companies could potentially be an early adopter of B-TRAN with the 2.1 million unit global EV charging station market expected to grow to an estimated 30.8 million units by the end of 2027.

These are all juicy opportunities, but we're still some time off from commercialization:

Source: Company IR presentation

The company has some important customers:

• A top ten player in the power conversion segment for the solar industry
• A top ten global automaker
• An EV charging station developer

And all of these in the space of just two weeks (July 20-August 3)!

And here are the next steps:

Source: Company IR presentation

The markets where adoption will likely proceed the fastest are EV charging and solid-state circuit breakers, followed by alternative energy and EVs as last, as design cycles in the latter tend to be long.

However, there is considerable pressure on the traditional car manufacturers from the headstart of new EV entrants like Tesla (TSLA) and a host of Chinese EV companies, so we might see faster adoption than is usual for new technologies.

While the company is working closely together with each customer producing switches to individual specifications in an iterative process, the company also strives for standardization which is especially important in the EV industry.

From our earlier article, we also know the company is already working on a version 2.0 based on Silicon Carbide, but this is still future music:

Source: May 2021 IR presentation

Finances

The company still generates minimal revenue (from the NAVSEA project), so what matters is cash burn. This turns out to be very moderate:

Data by YCharts

They are losing $4.5M this year and that's likely to increase to $6M next year on hiring new people for increasing cooperation deals with prospective customers, but with the $25.7M at the end of Q2, they can hold out for years to come. The company has no debt.

With 7.4M shares outstanding (fully diluted), the company has a market cap of $110M and an enterprise value of $85M.

Risk

The main risk is of course that none of their prospective customers with whom they are co-developing prototypes according to their specifications will ultimately adopt the technology.

While that risk is non-zero, the advantages seem too significant, especially in the industries in which the company is working where a few percentage points of efficiency gains are very important.

Conclusion

We see an interesting investment thesis:

• The company's B-TRAN solid-state power switch and circuit breaker technology is well protected by IP.
• The B-TRAN technology delivers commercially important advantages in reduced energy losses, increased energy efficiency, bi-directional switches, much faster circuit breakers, reduced parts, simpler, smaller designs, and better heat management properties, depending on the device and application. These advantages seem very significant in the context of the markets that it is aiming for.
• The company is fabless, working with one (soon two) wafer fab partners so the business model is very capital-light, generating 50%-60% gross margin when going commercial.
• The company is working with important prospective customers and government agencies producing devices to client specification in an iterative process. Customer interest is increasing, given the three new deals signed in just two weeks in the summer.
• While commercialization is likely to be at least a year off, the company has plenty of cash to survive multiple years.
• Acceptance could create a similar snowball effect as we have seen by another SHU Growth Portfolio holding, Aehr Test Systems.
• Given that the company is pre-commercialization, it's a high-risk, high-reward stock, not something to bet the bank on.

Disclosure: I/we have a beneficial long position in the shares of IPWR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.