As IPO's go, A123 has elicited a fair amount of discussion, much of it boiling down to this question: Is buying into the promise of the Massachusetts-based battery maker the same as buying into the hype that surrounded ethanol related stocks a few years back?
I've heard the concern, even from commentators on CNBC, and I don't buy it.
First, let me give you a little background on A123.
The battery maker is being touted as a play on the hybrid and electric car market. This is largely because it makes lithium-ion batteries that will power hybrid, plug-in hybrid, and electric cars. The fact of the matter is A123 also has sizable operations in the consumer (power tools) and industrial (power grid) sectors. Still, it is the promise of the electric car market that has investors salivating.
Right now, the lithium-ion auto battery market totals about $31.9 million according to the A123 prospectus. By 2015 it's projected to explode to $21.8 Billion and by 2020 it could top $74 billion. In layman's terms, it will be huge.
A123 is poised to get a good chunk of that business, along with other battery makers like LG Chem out of South Korea. No wonder the company's IPO is oversubscribed and investors are anxious to get some of this stock.
That said, there are critics who see A123 and the other electric car-related stocks as a repeat of the hype that surrounded ethanol-related stocks a few years back. The naysayer’s believe investors are buying into the battery stocks expecting electric cars to boom in popularity, when they may be a dud if gas prices remain low.
It's a fair point, to an extent.
I agree that relatively low gas prices in the U.S. will dampen enthusiasm for the first wave of electric cars to hit showrooms here, but what about overseas? In Europe and Asia -- where taxes make a gallon of petrol more expensive -- that fact, along with tax incentives to spur the purchase of electric cars, could make those markets more attractive when the first generation of battery powered cars come out.
Beyond that, there's a huge difference between battery stocks and ethanol stocks.
In the past, ethanol stocks surged on the belief that ethanol plants would pop up all around the country because high gas prices would drive more people to want to fuel their cars with it. But investors overlooked problems with the production and distribution of ethanol.
With electric cars and the batteries that power them, many of those limits do not exist. Sure, there are other hurdles and challenges in front of the electric battery makers, but the potential is huge.
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