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A123 Gets a Spark, But Will It Last?

New battery breathes life into AONE, but larger problems loom


The rise of electric vehicles has been hampered by cost, efficiency and numerous technological issues, so if the world is going to see an earnest move to EV, we’ll still need a few major breakthroughs.

And this week, we got one.

Battery firm A123 Systems (NASDAQ:AONE) surged ahead more than 40% Tuesday after it announced the development of new cells that can deal with extremely high and low temperatures without the need for extra heating or cooling mechanisms. This technology should help prolong the life of a battery and reduce the overall costs.

The news couldn’t have come at a better time. A123’s stock has become a mere shell of itself — AONE shares have shed 94% since reaching an all-time high of $25.77 right after its IPO in late 2009, and even after Tuesday’s lift, they’re still trading around a mere $1.50.

Needless to say, the company needed a lift.

A123’s new technology, called Nanophosphate EXT, is expected to hit the market in about a year, and it already looks like it will get traction with EV manufacturers.

However, investors should restrain their enthusiasm. In late May, the company’s auditor issued a “going concern” determination. In layman’s terms, that means the company could run out of money within the year. A123 did raise $50 million in May, but it looks like it will need to get more capital, possibly from a strategic partner.

A123 also has faced difficulties with its current products. This year, the company said it would have to replace defective battery modules and packs on the 2012 Fisker Karma — a move that would cost the $220 million market-cap company about $55 million.

Not to mention, A123 must deal with the problems of the broader EV market. So far, it has shown little traction as seen with sales from companies like General Motors (NYSE:GM), Nissan (PINK:NSANY) and Ford (NYSE:F). Despite the fuel consumption advantages, consumers still are resistant to big changes right now, and the U.S. economy’s strains haven’t helped.

Plus, A123 isn’t operating in a bubble — it must contend with intense competition, including Sanyo Electric, Hitachi and Samsung Electronics.

In the end, A123’s new technology might not matter much — at least for investors (past Tuesday’s bump). Given its dicey financial situation, the company is in a tough spot to negotiate a financing.

For now, if you’re not already in it, you should stay away from AONE.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.

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