After IPO, A123Systems Endures a Fickle Market

Emerging technologies are not for investors with faint hearts. Bulls with great expectations for innovations that can transform markets are often socked with unpleasant reality checks, while bears can be caught off guard when they start to make money. As A123Systems (s AONE) has shown since its IPO last September, the lithium-ion battery market is no exception to this rule.

A123System’s offering priced at $13.50 a share on Sept. 23, well above its previous proposed price range of between $8 a share and $9.50 a share. Its share price surged 50 percent on its first day to close at $20.29. But by late November, it had fallen back below $15 a share as Goldman put a price target of $14 a share on the stock, arguing that good news had been priced in. Goldman, a lead underwriter of the IPO, helped determine that offering price.

But Goldman’s sober outlook couldn’t hold the stock down for long, and A123’s shares are back at $22.39 as of Tuesday’s close. The rebound was helped along by a joint venture with SAIC Motor Corp., a major Chinese  carmaker, to sell battery syStems for electRic vehicles in China just as cleantech and auto sales are seeing growth in that country. At the time, an A123 executive told Reuters that the company was “looking to be basically the market leader in China, both in the truck and passenger car market.”

That turbulence may continue for a while. In a recent research note, Deutsche Bank said it expects battery prices to decline about 25 percent by 2015 from the current level of around $500 per kilowatt hour. Following a tour of A123System’s battery plants in China and Korea, Deutsche Bank felt that the company was ready to scale up to meet bigger demands.

“The maturity of operations, level of automation, and depth of manufacturing experience within each company’s subsidiaries gave us increased confidence that production scaling is a manageable risk.”

That makes for a potentially bountiful future, but the problem for investors today is that revenue and profits at A123Systems should begin to ramp up after 2012.

Meanwhile, there is the issue Goldman raised, which is that all the attention that A123Systems attracted in the IPO — which was the largest of 2009 — may have left it overpriced for the time being. Another analyst, Theodore O’Neill at Kaufman Brothers, saw a better bargain in Ener1 (s HEV), which shares some similarities with A123Systems.

“Both companies have multiple automotive and mass transit partners, not all of which have been disclosed… Both companies are pursuing consumer electronics, automotive and frequency regulation markets. Both companies have plant capacity… According to First Call, both companies are expected to report approximately $300 million in revenue in 2011.”

But a key difference is that Ener1 is trading at two times its estimated 2011 sales, while A123Systems is trading at six times. As a result, O’Neill said, “we believe the disparity between HEV and AONE is unsustainable.”