A123 Systems’ IPO Sparks Rally In Clean Technology Sector
I feel like I’ve traveled back in time to 1999. I remember that period of the market well. Back then I was a stockbroker just starting out with Smith Barney. I was managing tens of millions of dollars for clients who were all counting on me.
As you can imagine, I was studying the market relentlessly.
I saw a lot of amazing things happen that year. One of the craziest was the dot.com IPOs. Venture capitalists plowed billions of dollars into hundreds of internet start-ups. And, the public’s appetite for them was insatiable.
Almost every internet company that did an IPO that year saw its stock price soar. Many of them doubled, tripled, or more on their first day of trading. Those investors lucky enough to get in on the IPO made fortunes overnight.
We used to joke about it in the office. My manager once quipped, “All you need is a good story and the words ‘dot com’ in your company name and you’re an instant millionaire.”
And that was the truth.
Companies with very little or no operating history, no revenue, no profits, and unproven business plans attained billion dollar market caps overnight. You might remember Webvan, Pets.com, and eToys to name a few.
Of course, we all know what happened in the end.
Some dot coms blew their money on lavish advertising campaigns. Others discovered they could never make a profit. And, most of them went out of business within a few years of their IPO.
So, what happened to conjure up memories of IPOs past?
Last Thursday we had one of the biggest IPO days of the year. Five companies offered their shares to the public. The big winner was lithium ion battery maker A123 Systems (AONE).
AONE saw its stock jump more than 50%. At the end of the day, it had a market cap of nearly $2 billion. (You can see why I was reminded of the skyrocketing dot com IPOs.)
Why’s the stock soaring?
Investors believe AONE has the leading technology for next generation rechargeable lithium ion batteries. You probably own a few of these batteries right now. They’re commonly used to power cell phones, MP3 players, laptop computers and other portable electronics.
But, AONE has a much larger potential market in its sights.
It wants to be the top supplier of rechargeable batteries for hybrids and electric cars. And with good reason. The potential automotive market for these batteries is absolutely huge.
The market is near zero right now. But, it’s poised to explode. Deutsche Bank estimates $10 to $15 billion in battery sales by the end of next year. And, sales of $30 to $40 billion a year by 2020.
Here’s why.
President Obama has set the goal of one million plug-in electric vehicles on U.S. roads by 2015. Auto industry experts expect millions more in the years that follow. And, every one of them will need a rechargeable battery.
General Electric (GE) CEO, Jeff Immelt, is a big believer in rechargeable lithium ion batteries. He recently said, “I’d be long on battery technology… I think it’s a question of when, not if, it’s going to happen.”
There are several different ways to play the coming boom in hybrids and electric cars. But, the battery makers are believed to have the biggest upside potential.
You see, the most expensive part of the hybrid and the electric car is the battery. To make hybrids and electric cars affordable for most consumers, the cost of the battery must come down.
The company able to reduce the battery’s cost and still provide sufficient power and safety will ultimately control the electric car market. And, many institutional investors and auto industry experts think AONE’s battery technology will do just that.
But, that’s not all.
AONE also has strong backing from corporate heavyweights and the U.S. government. GE, Motorola (MOT), Qualcomm (QCOM), and Proctor and Gamble (PG) to name a few, have all invested in AONE. And, the Department of Energy has awarded AONE a $249 million grant to build world-class production facilities in the U.S.
Finally, AONE has developed strong customer relationships. Chrysler, BMW, Daimler, General Motors, Black & Decker, and BAE Systems are all doing business with AONE.
You can see why the stock is soaring.
Should we buy AONE at current prices?
With the stock trading just over $18 a share, the company has a market cap around $1.8 billion. That’s a pretty rich valuation for a company with no earnings.
Clearly, investors buying the stock today are betting on the future. But at this point, that’s all this stock offers… promises of big things to come. Personally, I’d rather buy it at a lower price.
However, given AONE’s huge potential upside, momentum investors may continue driving the stock higher. If you want to speculate on AONE, a good strategy is to establish a small position now and add to it on any dips.
Category: Stocks
