Alternative Energy Storage: Cheap Will Beat Cool

by: John Petersen November 16, 2008 | about stocks: AAPL / ABAT / ALTI / AXPW.OB / CBAK / CHP / ENS / HEV / HPJ / MSFT / MXWL / ULBI / VLNC / XIDE / ZBB    

John Petersen

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I’m a Mac user and have been for over 19 years. More accurately, I’m a serial early adopter of new technology. I bought Sharp’s first portable calculator in 1971; bought word processing, laser printing, videotape, compact disks and satellite TV in the early ‘80s; bought a cell phone and established an Internet domain in the early ‘90s; and had established a paperless office and a global practice by the late ‘90s. If it was new and cutting edge, I had to have it first regardless of the cost. So far, the only technical temptations I’ve been able to resist are an iPhone, because I don’t want that much connectivity, and an EV, because I don’t believe the available products are good enough. But I can pretty much guarantee that I’ll have an EV within a couple years, or as soon as somebody comes up with a reasonable solution that fits my relatively modest transportation needs.

I am not what most people would classify as a regular guy. But I have to admit that my perverse insistence on being an early adopter of the latest and best in cutting edge technology has more often than not led to product purchases and investment choices that ranged from disastrous to merely suboptimal.

My first portable calculator was a Sharp LE-8, a 1.6-pound four-function marvel that cost me about $350 and came close to costing me a wife. Within a couple years, it was a dinosaur that I replaced with an HP business calculator that did far more and cost about $250 less. The experience taught me nothing.

My first videotape was Betamax, a Sony product that was superior to but more expensive than the VHS alternative. Within a couple years after I bought the best technology the mass market chose the cheapest technology. It wasn’t long before Beta format tapes were hard to come by and after a few years I had to accept the fact that cheaper had beaten better. So I jettisoned my Betamax and joined the VHS world until DVD came along.

My first word processor was Xerox 860 system that cost about $14,000 in 1980. It offered a touch pad pointing device, full-page document views and the only black and white WYSIWYG display in the industry. It is my understanding that the Xerox (XRX) 860 was a big part of the inspiration for subsequent innovations by Apple, but those details are ancient history. I gave up my Xerox 860 when I changed jobs, but missed it for years.

I almost had a comparable experience with Apple (AAPL), which has always offered a superior operating system for professionals who simply want a complete set of tools that works. I moved from the PC world to the Mac world in September 1989 because I represented an authorized Mac software developer in connection with its IPO and was able to buy a top-end system at developer prices. But despite the technical superiority of the Apple products, the mass market chose the cheaper Microsoft (MSFT) - Intel (INTC) alternative.

Within a few years, Mac programs were hard to come by and were it not for software support from Microsoft and a huge bailout investment from Bill Gates in 1996, Apple might well have failed. Now that Steve Jobs is back at the helm and the price discrepancies between high end products have largely evaporated, Apple is able to command a modest premium for ultra-cool. But it clearly understands that the cool premium must remain modest or the mass market will go to the cheaper alternative.

Since September of 1989, both Microsoft and Apple have become huge and highly successful companies. But the following table provides an instructive glimpse of how a $10,000 investment in each of these companies would have fared over the 19 years that I’ve been a devoted Mac user.

 
Microsoft Corporation
 
Apple Computer
 
Price
Shares
Value
 
Price
Shares
Value
September 1989
$0.47
21,276.6
$10,000
 
$11.13
898.9
$10,000
September 1994
$3.50
21,276.6
$74,468
 
$8.42
898.9
$7,569
September 1999
$45.28
21,276.6
$963,404
 
$15.83
898.9
$14,229
September 2004
$27.65
21,276.6
$588,298
 
$19.38
898.9
$17,416
September 2008
$26.69
21,276.6
$567,872
 
$113.66
898.9
$102,166
 
 
 
 
 
 
 
 

The point of all this history is that a 1989 investment in the best available computer technology would have been far less rewarding than an investment in the best affordable computer technology. So the question for today’s energy sector investors is, “Do you honestly believe it will be different this time around?”

For several months I’ve been writing about a fundamental analytical disconnect in the energy storage sector. My earlier articles have focused primarily on macro developments in the energy storage sector how various classes of storage technologies have developed in the past and are expected to develop in the future. Now that most of the November SEC filings are available and we have current data for all of the battery producers and developers except China BAK (CBAK), it may be helpful to compare how the various companies stack up based on the numbers they’ve just filed with the SEC. To enhance comparability, sales and pre-tax operating income have been annualized based on reported year-to-date results and all amounts other than share prices are expressed in thousands.

(Click to enlarge)

Though sorely tempted, I will resist an almost overwhelming urge to comment on individual companies in the Cool Chemistry group other than to observe that ULBI, ABAT and HPJ are far more financially stable and reasonably priced than some of their gravity-defying peers. I will point out, however, that the Cool Chemistry group has only a small fraction of the assets, equity and annualized sales of the Cheap Chemistry group but it carries a combined market capitalization that is 2.25 times greater.

Frankly, I have a hard time understanding how any rational investor could believe that the valuation disparity between the Cool Chemistry group and the Cheap Chemistry group is justifiable under any reasonable growth scenario. Best affordable technology always wins out over best available technology. It’s been that way since the dawn of time and it won’t be any different over the next few years as annual revenues in the energy storage sector soar from $30 billion to $100 billion. Every company in the energy storage sector will likely see tremendous growth, but it will take a very long time for growth in the Cool Chemistry group to justify current market premiums.

Mark Twain quipped, “History doesn’t repeat itself, but it does rhyme.” Henry Ford didn’t make the best cars; he just made the cheapest cars. Microsoft didn’t make the best operating system; it just made the cheapest operating system. Xerox invented and then failed to commercialize more cool technologies than I can even begin to recount. Additional examples of the fundamental economic reality that price always trumps cool are far too numerous to mention.

When you cut through the alternative energy hype and drill down to business fundamentals, I have to believe that investors who want Microsoft class performance in the energy storage sector should be investing in the Cheap Chemistry group.

Disclosure: Author holds a long position in Axion Power International (AXPW.OB) and is a former director of that company.

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This article has 35 comments:

  •  
    Nov 16 09:54 AM
    A very interesting article John! I've seen both worlds being a 33 year Xerox retiree and from going from a Tandy 1000 (x286) at home in the Eighties to a Vista Ultimate 64bit today. Just like you, we used the Xerox 860's in the office from the origins of the Star Network and Xerox' original Ethernet and loved the products. We thought how could there ever be a better computer than this? I think just the word processing application has never been matched yet for "coolness", simplicity, and feature richness.
    Thanks for the enjoyable read...
    Reply | Link to Comment
  •  
    Nov 16 10:38 AM
    Scientists should invent units of energy storage, to help the progresam.Think to a car on electricity that would go 6 months without the need to be fueled.
    Reply | Link to Comment
  •  
    Nov 16 10:39 AM
    Great article!

    I have been an Apple fan since 1979 having been an Apple reseller and a Macintosh developer. I wouldn't touch a Windoze machine. But when it comes to buying Mac, I tend to buy the low end products. I'm writing this on an iBook G4 with the now obsolete PPC chip.

    An OS is not quite a commodity. There is a lot of personal investment in learning the use of an interface. This is why a technology to be disruptive must be ten times cheaper than the technology being disrupted according to Clayton Christensen. But energy is essentially fungible so expensive makes no sense except for very special uses like maybe a Mars orbiter.
    Reply | Link to Comment
  •  
    Nov 16 12:39 PM
    I remember the Xerox prototype system Lisa in the early 1980's. I was at IBM and we thought it was clever. Microsoft and Apple not only thought it was clever but they had far better business vision than IBM in this area and the rest is history.

    I agree with the cheap chemistry proposition. I have positions in ABAT and CBAT.



    Reply | Link to Comment
  •  
    Nov 16 01:50 PM
    Loved the charts....but would like even more to hear more about the kinds of batteries produced by these companies etc... Are the end uses the same or similar? I really have too much ignorance of the industry to make sense of such broad categories for comparison. Thanks....
    Reply | Link to Comment
  •  
    Nov 16 02:02 PM
    I'm seeing a lot of new commenter today. For those who have not been following this series but want to know more about the energy storage sector, a quick visit to my author page will give you links back to the entire series.

    Thanks for the kind comments so far.
    Reply | Link to Comment
  •  
    Nov 17 02:34 AM
    Finally found your comment on AXPW's lead content, back in August you said that they had managed to reduce the amount of lead by 40%. Any change from that level, that you know of?
    Reply | Link to Comment
  •  
    Nov 17 03:26 AM
    Target reductions are a bit higher but I think 40% is pretty accurate right now.
    Reply | Link to Comment
  •  
    Nov 17 08:44 AM
    those of us who do heavy duty graphics have gotta have macs (have 4 in the house @ the moment).

    my old G3 tower (OS9.1) ran both msword & wordperfect as well as a buncha other stuff. it caanot run safari or firefox.

    since no wordperfect utility is available for OSX i am stuck with some wordperfect files that can't be accessed. this is one type of obsolescence, software makers only cater to ibm compatibles.
    > jack
    Reply | Link to Comment
  •  
    Nov 17 09:01 AM
    Great article.. as I point out in the paper , see website , the use of current technology can provide EV's that will provide affordable and useful transportation. The problem is not who can make the perfect battery but who can make a personal transportation system that can get us to work, to school, to the stores etc. Not the big three that's for sure. My Batchange is so simple in concept it WILL become the standard.. even the low tech lead batteries would work in a Batchange system. Most EV promoters do not seem to get the fact that the running cost of the EV is far more the replacement cost of the batteries than the actual electrical usage!
    Reply | Link to Comment
  •  
    Nov 17 09:11 AM
    John,

    Nice article as usual. Your last article was the best I have seen you write and I appreciate the global overview it gave. You might mention in this and subsequent articles that the storage competitors are not all public companies.

    I listened to John Granville on the recent conference call, as I am sure you did as well, and I was pleased to hear how up beat he sounded. I think things are happening nicely there. However, I believe it is still too soon to invest due to the large number of shares outstanding and the need to get a huge buildup in sales before the share value goes up appreciably.

    Thanks again for your efforts and your articles.
    Reply | Link to Comment
  •  
    Nov 17 09:42 AM
    I suppose time will tell Rick. Tom Granville said they were going to make the first shipments on the $6.4 million contract this month and Axion was hoping for a couple million a month in toll-manufacturing revenue by the middle of next year. If fabrication equipment development stays on track, the revenue from 10,000 to 20,000 PbC batteries per month could easily double that figure. For what it's worth, my tables always show fully diluted share numbers giving pro forma effect to preferred stock conversions.

    I think more progress is necessary, but I don't think the market will let the stock stay at current levels once the revenue starts ramping up.
    Reply | Link to Comment
  •  
    Nov 17 09:59 AM
    I just found a Wall Street Journal piece that mentions ZBB (part of my Cheap Chemistry group) quite favorably:

    online.wsj.com/article...
    Reply | Link to Comment
  •  
    Nov 17 01:44 PM
    Display Port technology on the way for your laptop, External powerful Graphics by AMD for CAD on your laptop or the latest games, whichever.

    Already announced, yadda yadda.

    I don't know what it brings to AMD for its future, but believe Intel has a challenge here.
    Reply | Link to Comment
  •  
    Nov 17 02:39 PM
    Another way to summarize your Apple Microsoft comparison would be that in this decade, an MSFT investment is worth about HALF what it was in 1999, while an APPLE investment is worth about SEVEN TIMES what it was in 1999.
    Reply | Link to Comment
  •  
    Nov 17 04:26 PM
    You'll never hear me say a bad thing about Apple. But it took them over ten years and a return of Steve Jobs to take the best technology to a point where it out-performed the cheaper technology.
    Reply | Link to Comment
  •  
    Nov 17 05:07 PM
    It wouldn't be so bad if us "early adopters" and off the beaten path folks wouldn't be bothered by the choices of those other less fortunate, ill advised folks :) Still, the mass majority has the uncanny capacity to believe too quickly things that cannot be understood rapidly.

    Yes, my next new car will be fully electric and with no PHEV or extended range gimmicks. Yes, I will convert my old cars to electricity, especially the light ones. Yes, my next laptop will still be an Apple, because it always works! When it won't anymore, the early adopter in me will go to another system. Yes, my next residence will be solar and wind friendly. If I can pitch a deep enough hole, I will use geo-thermic energy. I will continue using products that work and have my friends see them as the reality they are, that saves me money in the long run, work and are good fir the environment. Simple, no?
    Reply | Link to Comment
  •  
    Nov 17 07:47 PM
    BTUs IN, electricity OUT.

    At about 3412 BTUs/KWh.

    Flipping the middle finger at the laws of thermodynamics may not be a good idea?

    www.prosefights.org/nm...

    Reply | Link to Comment
  •  
    Nov 17 08:01 PM
    Correction

    "At about 3412 BTUs/KWh. "

    More than 3412 BTUs/KWh.

    Second law of thermodymics.

    www.prosefights.org/nm...



    Reply | Link to Comment
  •  
    Nov 18 01:04 AM
    Let me improve my last prelude to commenting last week--here in this wonderful forum--from, "This market is nutty," to, "This market is spastic."

    Yes, spasitic it is. A perfect indicator to how insane things have become is that Star Bucks is now worth more cap-wise than GM. And Star Bucks I would not invest in with a five-to-one put using Monopoly money.

    Another is how Bidu crashed 25% today, on spare, almost spam-like news. How in the hell can that happen? This stock market is 'droiding south on paranoia.

    And this Energy Storage Sector, which I think will be right behind commodoties when things turn up, is equally insane.

    But here's what bothers me about this sector...just maybe, John Peterson is right about the lithium commodity debate. I read today a Forbes article that still did not undress whether or not there is enough, as I would put it, "easily convertible" lithium in the world to make regular joe-like cars go.

    This deep, this close, this many auto manufacturers who are about to infuse bilions into lithium-ion vehicles is ripe for investment. But...

    Sidebar: About this insane market: to those regular readers that never comment here, I did once say somewhat proudly that I bought exide (XIDE) at $4.20 a share. Sold that that for a profit. And now what, a week plus later, it's $3.20?

    All this makes me wonder why I read so much about the kilo watt hours given forth by any battery...

    Worldwide, all stock markets are topsy turvy. This adrenelin-crazed paranoid (experimenting) day trader is hugely bullish on the Energy Storage Sector. There is so much money on the sidelines right now, including most of mine. I recognize there are multiples, and the cool part is that the multiples keep increasing. But just when do I/we commit?

    My gut tells me that the DOW will test and test again the bottom. I read all day. The experts say that the bottom has been tested three times and that that means the bottom is in. The whole world is pumping money into the global economy, and yet the Russian stock market can't stay open for two minutes. What I see, or better yet, feel, is to wait.

    I just hope my Exide goes above $3.20.
    Reply | Link to Comment
  •  
    Nov 18 01:43 AM
    The nice thing about commitment, particularly at my level of commitment, is that all you can do is take the Sam Walton view of things: "I still own it all so I haven't lost anything."
    Reply | Link to Comment
  •  
    Nov 18 09:14 AM
    Better take delivery of the certificate, thats the only way you can keep any of it once its gone. After that its one on one against profits or $3k worth of reduction annually. But you still have the certificate. I still have some TWA warrant certificates from the 1970's.
    Reply | Link to Comment
  •  
    Nov 18 11:50 AM
    Mercifully I haven't had a wash-out like that since '87 and don't foresee one any time soon.
    Reply | Link to Comment
  •  
    Nov 19 07:21 PM
    I was wondering where can I get the physics involving this new Li-ion battery technology.
    Reply | Link to Comment
  •  
    Nov 20 01:35 AM
    Neweast, for starters I might suggest batteryuniversity.com. It provides a good general overview of how the principal battery technologies work. Beyond that, there is a wealth of information available as you use your favorite search engine to dig deeper into technology issues.
    Reply | Link to Comment
  •  
    Nov 22 10:44 PM
    John Petersen what do you think about CSGH.OB ? I have been watching it drift down and wondering if I should take a bit. They mine for Lithium.
    Reply | Link to Comment
  •  
    Nov 23 09:01 AM
    CSHG's Form 10-K says that its three main products are cobalt carbonate (CoCO3), cobaltosic oxide (Co3O4) and lithium cobalt oxide (LiCoO2) that are manufactured in its ±260,000 sq. ft. of production facilities. It has only recently acquired an interest in an African mine.

    CSHG sells the bulk of its processed materials to a small number of Chinese battery producers, but has other potential customers offshore.

    The stock is currently trading at slightly less than book value and has a P/E ratio of about 3.

    I don't know enough about their business to offer advice, but nothing jumped out that would terrify me, other than the economic downturn that will likely reduce sales and profitability over the short term.

    On balance, I think that an investment in a materials producer that sells materials to several li-ion battery producers offers more diversity than an investment in a single battery producer. It also avoids a number of potential products liability issues that are more severe at the battery producer than they are at the materials processing level.
    Reply | Link to Comment
  •  
    Dec 01 11:42 PM
    The sleeping giant in electricity storage is thermal energy storage in solar thermal power plants. Look at Andasol: 50MW, 7 hours, and something like 93% efficiency. It dwarfs battery deployments, and 5 more projects like it are in construction, as well as a first US project, Solana, which at 280MW will be about as big as all the Spanish units. And the solar thermal industry is just getting started, with mu