A123 -- Ready for an IPO?
Disclaimer: Although I am not an investor in A123, I am on the Board of Boston-Power, a battery company that does not currently compete with A123, but may in the future.
Last week, A123 filed their S-1 in preparation for a potential IPO. A123 is an innovative company that spun out of MIT. They have battery technology that is currently used today in DeWalt power tools. They are also working on projects for hybrid electric vehicles and other applications. The company has raised at least $133M of venture capital and has generated lifetime revenues (through March 2008) of about $72M.
I've spent a lot of time over the past year looking at public companies. Although A123 looks exciting for the long-term, I have my doubts about their ability to either go public or, in the near-term, be a successful public company. Their business just hasn't developed enough to sustain value in the public markets.
If you study their financials, you'll see that they have approximately zero gross margins. That means that their selling costs don't quite cover their material costs and manufacturing overhead. Low gross margins are not surprising for early stage manufacturing companies. They are not yet selling at high volume and are investing in manufacturing capacity for the future. But, it's disconcerting to me that even at $10M in revenue per quarter that they have slightly negative gross margins. On top of that, the company has a significant rate of spending for engineering, sales, marketing, etc. at $13M in the March 2008 quarter.
Clearly, A123 is trying to go public based on their future potential. And, that potential could be very high. But, I find the public markets to not be very forgiving of these types of companies. In fact, it could be tough to go public at all right now. Now, perhaps the company has some additional deals and information up their sleeve that they would only release when they update their S-1. Perhaps they are the rare company that can pull off a high-promise IPO in this environment. If they do go public, they'll have to convince investors on an ongoing basis how they will build into a sustainable business. Any missteps along the way will likely result in significant stock price punishment.
Ultimately, I wish A123 the very best. If they can go public and sustain their value with this type of profile, it will bode well for Boston-Power, too. But, don't be surprised if they proceed with caution toward an IPO. The market is not a forgiving as it has been in the past, even for companies with interesting technology in a hot space.
