ADSE - ADS-TEC Energy: Past Performance Conflicts With Potential

2023-08-29 04:31:15 ET

Summary

• ADS-TEC Energy has seen impressive stock market gains of 157% YTD, on a strong outlook for the full year 2023 and expectations of continued momentum in 2024.
• Its EV charging solutions have high potential in a fast-growing market, but the company's past performance is a downer. It's also up against stiff competition.
• It's best to wait and watch if it's able to consistently perform before making a long-term commitment to the stock.

Electric Vehicle [EV] charging solutions developer ADS-TEC Energy ( ADSE ) has seen impressive stock market gains of 157% year-to-date [YTD]. This is largely because of an almost discrete jump that started in early May following its full-year 2022 results (see chart below).

At USD 7.7 at the time of writing, its share price has made up significantly for the lost ground from late 2022 to early 2023. Still, it's trading 20% below the opening price since it went public in December 2021 via the SPAC route. The question now is, can it recover the entire lost value?

The company through the years

The Irish company, which is supported by German engineering, with a factory in Dresden and assembly in Alabama, US, has come a long way since it developed its first battery packs in 2008 (see chart below). Today, it focuses on battery storage systems that support photovoltaic [PV] systems, which use solar power to generate energy. That they allow use of this generated energy even after sunset, is their highlight.

But it’s the company’s EV chargers that are really bringing in the revenues now, even though it got into the business only in 2018. With the constant charging of its battery storage systems from the public grid, these solutions are able to deliver ultra-fast charging. The charging business is divided into three parts:

• Charge box: This contains the battery and power inverters, and is positioned for usage in small spaces.
• Charge post: It’s what the company describes as “a semi-mobile ultra-high-power charger”. The post can be connected to existing grids, with little construction required and it also has the option of advertisement screens for customers looking for add-on revenues.
• Charge trailer: The mobile charger, which is the size of a standard trailer, has the capacity to charge up to 10 EVs in a go. Its target market can be for temporary usage with heavy traffic, such as big events.

The company also provides support services for products sold, which include maintenance, repair and replacement of parts.

Growing EV demand, supporting infrastructure

There’s little denying the potential of the company’s products going by the fact that light duty EVs saw a 55% increase in sales in 2022, even as the total car market contracted by 3% during the year.

EV penetration in Germany, the company’s biggest market with a 74% revenue share as of 2022 is quite low at 2% right now, but the forecasts look good. Revenue for EVs is expected to grow at a compounded annual growth rate [CAGR] of 14.4% from 2023 to 2028, which would almost double the size of revenues to USD 103.4 billion by the end of the forecast period.

Similarly, in the US market, where the company intends to expand, EV sales had a small share of 4.6% in 2021. But are expected to account for 40% of auto sales by 2030.

With a growing demand for EVs, ADS-TEC Energy points out that power infrastructure can come under pressure. Specifically, it points out the extent of power infrastructure development needed in the US to support accelerated EV usage (see chart below). This makes a case for its own products, that support battery buffered charging. It estimates that peak power demand can be reduced by 65% with this solution compared to the commonly used chargers today.

Inconsistent past revenues

Despite the sector’s potential, however, the company’s numbers are wanting as of now. Still loss-making, ADS-TEC Energy’s past revenue growth numbers aren’t entirely encouraging either. While it saw a 148% revenue growth in 2020, the numbers have dropped by 30% and 20% in 2021 and 2022 respectively.

I see 2021’s drop as a particular red flag considering that it happened on account of a drop in a single customer’s demand. With 56% of its revenue generated from one customer during the year, the decline reflects the vulnerability of the company’s business model with dependence on a few customers only.

2022’s drop is more understandable, though, since it followed supply chain disturbances. Also, it does mention factory production and services worth EUR 45.6 million, which indicates that it could have seen an over 38.2% year-on-year (YoY) rise if the products were sold during the year.

Positive outlook

The company’s outlook for 2023 is quite positive. It expects revenues to rise to over EUR 100 million , which is a 4x increase over the past year. I’m specifically encouraged by its order backlog of EUR 90 million already, which indicates that if they are supplied in the current year, the company’s revenue targets are all but assured. It also points out that the orders are from “solid customers”.

The company also expects to break even at the EBITDA level, if not make a profit. Further, it says that “Existing customers and partners are forecasting and expecting to significantly increase their revenues in 2024, which confirms the strong momentum and growth for ADS-TEC Energy business.”, which is a positive for the next year too.

Market multiples

The company’s forward price-to-sales (P/S) multiple is at 3.6x, which is higher than that for industrials. However, considering that it’s part of a fast growth market, I looked at some of its peers to get a better idea of how it's placed.

Turns out, that the valuations are all over the place. Eos Energy Enterprises (EOSE), which offers commercial energy storage solutions, for instance, has a forward multiple of 16.1x. At the other end is Blink Charging ( BLNK ) at 2.3x.

At this point, however, going by BLNK’s example, I think ADSE could decline further. Blink Charging has a history of strong revenue generation compared to ADSE and yet it's trading at a lower multiple. Moreover, EV charging is a competitive market, with the company is up against some real heavyweights like Shell (NYSE: SHEL ), BP (NYSE: BP ) and Siemens ( SIEGY ). This indicates that it could take time for the company to get a firm footing.

What next?

There’s significant potential in ADS-TEC Energy’s market, considering the sector is in a fledgling but fast-growing state right now, with rapid EV adoption. The company has a positive outlook for the current year, which also likely led to its stock price rally in May this year.

But EV charging is a competitive market, where it might take a while for it to truly establish itself. It doesn’t help that its revenue growth numbers for the past years aren’t encouraging either. Its forward P/S also indicates that the stock might have run ahead of itself for now.

To go back to the original question, though, I believe that the stock could just touch its previous highs on positive impetus. The bigger question, though is, whether it can sustain them. Its past performance and future potential suggest that it can go in either direction. I’m going with a Hold on ADSE.

For further details see: