Shares of A123 Systems (NASDAQ:AONE) are up 18% in the past few days on news that the company reached an agreement with General Motors (NYSE:GM). The deal means A123 Systems, which makes rechargeable lithium ion batteries for electric cars, will be the supplier for General Motors production facilities — not just for the much-hyped Chevrolet Volt, but the Chevrolet Spark EV expected to hit markets in 2013.
But investors should be wary. For starters, the electric vehicle market is anything but a sure thing and consumer demand is questionable. And most importantly, AONE stock has been eviscerated as the company has been bleeding cash and struggling to achieve broader success. A GM partnership alone might not save A123 Systems from becoming yet another green dream of a company that never made things work on the cold reality of Wall Street.
On the plus side, AONE has seen revenue more than double from 2007 to fiscal 2010 — from $41 million to $97 million. And battery sales to General Motors will mean even bigger revenue to come as the company becomes a major supplier. But sales are different than profits. The fact is that A123 Systems never has turned a profit in any of those years. In fact, it hasn’t turned a single quarterly profit since 2007. That’s an ugly track record.
The theory is that high-tech start-ups like this can afford to lose money for a few years before finding its footing. Amazon (NASDAQ:AMZN) famously went public with the admission it would not be profitable for five years, and now it’s a powerhouse of e-commerce and one of the most successful dot-com stories on Wall Street.
But electric vehicles are not the Internet. It’s unrealistic to think that internal combustion engines will be wholly replaced by EVs and AONE batteries anytime in the next decade — and perhaps even in any of our lifetimes.
AONE is not going to go bankrupt anytime soon. It holds $240 million in cash and only $175 million in total debt, so the company can afford to bleed cash for a little while longer.
But as an investment, A123 systems is dead money. The company has done nothing but decline since its 2009 IPO — offering at around $20, gapping up to $25 a few days later, then steadily declining to current valuations around $4 per share.
And that $4 is up significantly from the company’s 52-week low of $2.77.
Equally telling is that earlier this month, a Wunderlich Securities analyst boosted his rating for A123 to “hold” from “sell” — but still cut his price target to $3 from $3.50. Maybe you can grant AONE stock another $1 per share, or 33% premium, based on the GM deal — but that still only gets you to the current levels of $4, with no upside from here.
The GM deal could indeed be a sign of hope. And the recent pop in AONE stock might stick. But if you didn’t already own AONE stock and see a nice upward move in your shares, I would be leery of buying in now that the optimism of a General Motors contract is baked into share prices.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
