Any day now battery makers are going to begin shipping large numbers of battery packs for electric vehicles. That day can’t come too soon for A123 Systems (NASDAQ: AONE), which saw its shares get pummeled earlier this week when it posted third-quarter results.
A123 is partly owned by General Electric (NYSE: GE) and has entered a joint venture with the largest carmaker in China, SAIC Motor Corp., to provide batteries for a vehicle that is due for shipment in 2012. The company posted a larger-than-expected loss for its third quarter, and the losses are expected to continue in the fourth quarter. The good news is that revenue is expected to rise, and full-year 2011 revenue is currently estimated by analysts to be more than double 2010 revenue.
The company had expected to begin ramping production volume in the fourth quarter, but now says that production ramping won’t begin until the second quarter of 2011. A123’s largest auto customer is Fisker Automotive, makers of the world’s first true electric vehicle with extended range.
A123’s other business is developing grid-connected batteries to store electricity generated by wind and solar power that could then be released either to meet peak requirements or to smooth out deliveries of base load. A123, like other battery makers, has only just turned its attention to grid-connected storage. If it can deliver enough lithium-ion batteries for electric vehicles, the potential for grid-connected storage could push the company to the point where it deserves its valuations.
Competition for leadership in both vehicle and grid-connected batteries comes from a number of companies, most of which are also struggling. China’s Advanced Battery Technologies (NASDAQ: ABAT) and U.S.-based Ener1 (NYSE: HEV) compete for the electric vehicle market, and Ener1 also has plans to work on large stationary batteries that would compete for grid-connected business.
In the near term, though, electric vehicles are being counted on as the engine that will drive these battery makers. And that’s because that’s where the hype is. But until battery makers can lower battery pack costs to well below $1000 per kilowatt hour, the market for electric cars will be driven either by early adopters or by government incentives to buyers of electric cars.
For A123, getting to those lower costs is challenging, and that’s the reason investors are becoming increasingly wary of the shares. The stock is getting back some of its recent losses today on news of the deal with SAIC. But somehow pricing in a deal that’s nearly two years away doesn’t seem like the smartest thing for an investor to do in a sector as volatile as batteries.
