SES - SES AI: Lags Behind Risks Outweigh Potential

2023-11-03 23:05:57 ET

Summary

• SES AI Corporation is a small-cap company in the lithium battery sector with a focus on lithium-metal batteries.
• The company's technology lags behind competitors, and it is unlikely to catch up in the race for technological supremacy.
• SES AI's future prospects rely on securing agreements for mass production, but there is uncertainty surrounding these agreements and the company's ability to meet performance expectations.

I can now celebrate having meticulously analyzed nearly all the small-cap companies in the lithium battery sector, especially those with potentially disruptive technology. Consequently, a comprehensive analysis of SES AI Corporation ( SES ) is certainly warranted.

After carefully examining the company, its history, and its future prospects, I am convinced that it is one of the worst stocks in the segment and will initiate my coverage with a STRONG SELL rating. My investment thesis is based on the fact that the company is lagging behind where it should be today, both in terms of manufacturing and technology.

SES AI deserves credit for taking a completely different approach from its competitors in producing lithium batteries. However, in the frenetic race towards technological supremacy in batteries for EVs and energy storage, I believe this is one of the many companies that will be left behind.

Business Model: A Bet on Lithium-Metal Technology

SES AI focuses on lithium-metal batteries (LMBs). These batteries use pure metallic lithium as the anode, instead of the conventional graphite-based materials used in lithium-ion batteries. This may seem like a minor difference, but theoretically, lithium-metal batteries can achieve a much higher energy density compared to traditional lithium-ion batteries.

To draw a comparison, the battery cells that Tesla currently installs in a Model 3 have an energy density of about 265 Wh/kg . The battery cells of SES AI, according to the company's claims , have an energy density of 417 Wh/kg. This means that, for the same weight, they can deliver significantly more power (or conversely, for the same power, they weigh much less).

Lithium-metal technology has been around for a long time but has always faced a major problem: dendrite formation. These metallic residues that form inside the battery drastically reduce its lifespan and can cause sudden short circuits, which is why LMBs have never reached large-scale production. SES believes that its technology has solved this problem, but it's important to remember that even SES has never actually produced these batteries on a commercial scale.

The company is headquartered in Boston, where its core R&D activities are also located. Production, however, is split between two centers located in Shanghai and South Korea. This is already a first inefficiency, as it means that in the future, production will either have to be relocated to the USA or forgo the incentives of Section 45X of the IRA.

The Path to Commercialization

SES AI was founded in 2012 as an MIT spinoff, and since then it has primarily focused on research in two areas: LMBs and artificial intelligence. The goal of AI research is to develop software capable of better regulating and monitoring batteries, collecting data useful for safety and improving the materials they are built with.

Currently, the company has secured three commercial agreements with three OEMs, and with all three, it has moved past the phase of sending A-samples for testing its battery cells. Now it is beginning the production of B-samples, aiming to produce 1,000 units per month of SES's most advanced batteries (100 mPower, with a capacity of 104 Ah).

The company expects that by the end of 2024, testing on the B-samples will be completed, and at that point, it intends to negotiate with the three OEMs the details for the production of C-samples and finally reach an agreement for large-scale production. So far, it has taken about 18 months to complete each phase: maintaining the same pace with the C-samples and mass production, it means that the company will truly begin to produce its batteries on a large scale by the end of 2027 or the beginning of 2027.

To clarify the samples:

• A-samples were single battery cells
• B-samples are small battery packs
• C-samples will be complete battery packs, ready to be installed in an electric car

Quoting the words of the CEO during the Q1 2023 earnings call :

Yes, sure. So we enter to B-sample second half of this year and then '24, next year, towards end of B and beginning of C, that's when we basically sit down with the 3 OEM partners. And also potentially, they are large-scale battery manufacturer partners. And then sit down and plan location and resource for C and SOP. So A and B are sort of similar and then considered together and the pilot scale plant. But once you get to C and then start planning for C, then you also plan for SOP.

Financials and Valuation

Below is a table with the data I consider most important for analyzing SES AI (source: Seeking Alpha, data in $ millions).

As you can see, the numbers are typical of a pre-revenue company. It's interesting that the revenues were exactly zero: unlike QuantumScape, EOS Enterprises, or Solid Power, the company hasn't been able to secure government contracts or payments from the joint-development agreements that SES has signed with GM, Hyundai, and Honda. In my opinion, this indicates a certain lack of confidence from the most important stakeholders.

As for the company's valuation, in my opinion, it wouldn't be relevant to use multiples since we are talking about a pre-revenue company. Instead, I find it interesting to compare this company with other micro-caps that deal with innovative battery technologies.

Those who have read my previous analyses know that among these companies, my favorite is Solid Power, thanks to its capital-light business model that focuses on producing electrolytes for solid-state batteries to sell to other complete battery manufacturers.

The valuation of these companies is nothing more than the intersection between the market's confidence in their disruptive potential and the risk that they may fail due to technological overtaking by other competitors.

Why I'm Bearish on SES AI

For SES shares to turn into a good investment, the company must win three races against time:

1. The race against cash burn
2. The race against competitors
3. The race to negotiate the C-samples and the SOP (Start of Production)

Starting with cash burn, cash from operations in the last quarter was negative $15.5 million, similar to the previous quarter. The company has cash & equivalents of $356 million, largely from a shelf registration made at the beginning of the year. Now that the company is significantly increasing production volume for B-samples, and not to mention the subsequent transition to C-samples, cash burn is starting to become a significant problem. Since SES is not getting any kind of revenue for the samples, liquidity could become a serious problem in the future. That said, a company with great potential could still benefit from market optimism even in case of new share dilution.

The second challenge worries me much more because, as we have seen, only in mid-2024 will they start talking about C-samples and SOP. Considering that each transition has taken an average of 18 months so far, this means that mass production will begin when SES's technology could already be outdated. In fact:

• SK will start mass-scale manufacturing of solid-state batteries before the end of 2028 ( source )
• CATL has a 500 Wh/kg battery that will enter mass production within the next 12 months ( source )
• Toyota claims that they will commercialize SSBs in 2027-28 ( source )
• Samsung SDI will transition to mass-scale production of solid-state batteries in 2027 ( source )

Conclusions and Final Thoughts

I would like to point out that the entire industry is moving towards solid-state batteries, while only SES believes that liquid lithium-metal batteries are the future. Solid-state batteries can have a lithium anode, while SES's lithium anode batteries cannot support a liquid electrolyte. The company stopped researching solid-state batteries in 2015, even though SES also believed that SSBs were the future. I strongly doubt that technology with a liquid electrolyzer can keep up with competitors.

Lastly, SES's future lies in agreements that don't yet exist for the C-samples and mass production. Not only are the agreements still missing, but so is the data: producing a single battery cell is one thing, while producing a complete battery pack is another. This is not a minor detail: as mentioned, the battery cells of a Tesla Model 3 have an energy density of 265 Wh/kg. In comparison, the complete battery pack has an energy density of just 150 Wh/kg. This means that over 40% of the energy density is tied to the manufacturing of the battery pack and not to the battery cells, and so far there is no information on the performance that management expects for the battery packs.

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