A123 – The consequence
This move may be a blow to A123 but a great opportunity for Digital Lumens. We wrote about ‘The Past, the now and the future of A123‘ earlier this year. With Michael Rubino leaving we feel that A123 has a lot to answer for. A123’s share price is down some 40% since IPO and the future path is somewhat in limbo. Losing a senior executive certainly adds to the uncertainty. Thus it is not surprising that Wunderlich Securities downgraded the stock. The new target price stands at $6! Now, for a company that was never profitable $6 may be considered good (remember those dot.com valuations?) but it certainly does reflect that the growth trajectory and EV/PHEV adoption curve is likely to be slower than anticipated. Arguably, we could see the stock trade lighter than current levels. However, at some point we would think that some large automotive players East (SAIC) or West (VW, Daimler – Smart) may have an interest in looking at the company.
The hard facts are bleak: A123 posted a loss of some $44m, with revenues at $26m. A turnaround seems still some quarters away. A $6 share price doesn’t sound too bad when compared to our dot.com friends who may have had similiar costs but nowhere near as interesting revenues.
How does A123 business success relate to the EV sector? One of the interesting electric vehicles we have looked at is Th!nk, the Norwegian EV producer. (A HBR case study can be found here; paid content.) In May 2010, Think presented an update on its business. It essentially announced that another $40m of equity was provided by the existing shareholder base. Moreover, the company projects that it will be cash-flow positive by 2011. A123, Enerdel (promo video) and Zebra will provide batteries ranging from 18 Kwh to 28 Kwh.
Think and Deutsche Bank provide a chart (see above) that summarized EV model releases over the next few years. So is A123 depending on the speed up model ramp up or are EV manufacturere depending on battery capacity? The interdependence is obvious and securing battery supply has long been a key battle ground.
Digital Lumens – Opportunity in the LED & SSL space
Digital Lumens operates in the energy efficiency segment which we consider is more attractive in the near term than betting on technology backed companies alone. Rather, the opportunity to replace existing stock with better materials seems obvious and makes both commercial and ‘green’ sense. LED lighting in particular appears to be attractive for its energy savings potential. The Department of Energy (DoE) has set up the Solid-State Lightening initiative (SSL) that proposes that it can cut US energy lighting usage by 25%. In March 2010, the DoE published a Muli-Year Program Plan for SSL. The report states that ‘[t]he global lighting fixtures market is expected to reach $94 billion by 2010, and SSL is expected to play a substantial role in the market by that time. Sales of high-brightness LEDs (HB–LEDs), the technology associated with LEDs for lighting applications, were $5.3 billion in 2009.” Siemens‘ Osram’s Sylvania program notably focuses on SSL.
Khosla Venture and General Catalyst have both been active in the LED space: both funded LumenZ, a Boston based University start-up. Checking on Khosla’s website, we fail to find it in their Portfolio section. However, in a presentation delivered in 2009, it is still in the portfolio. Highland Capital Partners made an investment in QD Vision. QD’s pitch is interesting ‘QD Vision is developing quantum dot solutions for efficiently backlighting mobile phones and other mobile displays, as well as LCDs for desktop and notebook computers and LCD television screens. These initial applications alone represent an addressable market exceeding $2 billion by 2014 for quantum dot-based components’. According to some news sources, QD Vision has raised a total of US$33m to date.
Overall, as costs of LED is coming down the adoption curve is likely to increase significantly. For now, technology hurdles, costs, and general consumer/ commercial acceptance are issues that need to be addressed.