When A123Systems went public last month, shares started at $13.50 and topped $20 by the close of the first day of trading. The opening price far exceeded the company’s initial price range estimate of $8 to $9.50 a share, and vindicated the company’s decision to postpone its IPO last year (see October 29, 2008 LRPJ: client registration required).
According to a Reuters article, the 50.9% increase makes the A123Systems IPO the second-most successful American IPO this year (the most successful was OpenTable, an online restaurant reservation company that rose 59.5% in its debut in May).
From the perspective of A123System’s VC and corporate investors, however, its exit does not live up to the hype that led to over $350 million of investments to date. A recent peHUB post (registration required) indicates that at best investors made out with around a 7x multiple (Alliance Bernstein), while suffering returns as low as 3x at the low end (Sequoia Capital and GE) – even assuming the stock price stays high long enough for venture investors to realize those gains (typically six months after IPO). Our sources would call peHub’s analysis into question, indicating that many early investors made out with greater than 10x returns. However, given the capital required to take the company to exit, A123Systems was certainly not a grand slam like the internet and software firms most investors are familiar with, and it represents a continuation of the lack of success that VCs have had in the storage arena. (See the Lux Research State of the Market Report “Alternative Power and Energy Storage Financing: Can VCs’ Good Times Last?” client registration required).
The real question for investors
At this point, the most important question is: What are the prospects for A123Systems going forward?
The company’s cash position should be in good shape for the foreseeable future, thanks to the IPO (the company priced 28.1 million shares, raising $378 million), and a recent $249.1 million grant from the U.S. Department of Energy (DOE). However, while we’re not stock-pickers, it’s hard to escape the impression that the market’s valuation of the company at around $2 billion relies on misplaced optimism about the company’s prospects in the burgeoning electric vehicle market. For starters, A123’s main automotive partner, Chrysler, has well-documented problems and a poor plan for electric vehicles. Moreover, the lithium-ion-powered electric vehicle market will only be a runaway success if oil prices skyrocket, while if oil prices remain constant global lithium-ion sales for passenger vehicles will be barely more than $500 million by 2020. (See the Lux Research State of the Market Report “Unplugging the Hype around Electric Vehicles.” (client registration required)
On the other hand, A123Systems has many viable markets for its high-power lithium iron phosphate cells beyond light electric vehicles. Southern California Edison has applied for a $25 million grant from the DOE for a 32 MWh battery system from A123 to provide backup for 4,500 MW of wind generation in the Tehachapi region.
Elsewhere, AES, a major power producer, placed an order for 68 MW of grid batteries. Additionally, while passenger cars are a long way off, hybrid buses powered by A123’s batteries (in partnership with BAE Systems) are an increasingly common sight on the streets of New York City. And not to be overlooked is A123’s long-time breadwinner – its relationship with Black & Decker for cordless power tool batteries, which has accounted for a good chunk of the company’s nearly $90 million in revenue over the past 12 months.
In short, A123Systems has a winning technology that has found niches in several fast-growing markets – just not the one that most investors seem to be banking on.
