SLDP - Solid Power Inc.: Despite Warning Signs Don't Sell At A Loss

2023-03-10 09:51:01 ET

Summary

• SLDP shares are down by about 60% over the last year due to poor earnings.
• There are some warning signs about the company, but there is also a lot of optimism in the strong growth levers.
• Given the promising future, it's better to hold than sell at a loss.

Investment Thesis

Solid Power, Inc. (SLDP) works on solid-state battery technologies for electric vehicles (EVs) and other markets in the US. Over the last year, the company's performance was precarious, with its shares plummeting by about 60%.

The awful performance can be attributed to the company's poor financial results. With revenues at $11.789M, its earnings were -$9.55M (-81.1% profit margin). Further, the company had free cash flows at -$92.618M and cash flows from operations at -$33.824M. These figures sum up the awful state of the company's financial performance as of December 31, 2022. The poor earning were primarily due to the high operating expenses resulting from several factors.

The chief financial officer of the firm explained that the rise in operating costs was due to an increase in the cost of labor and materials brought on by the company's decision to expand its operational and development investment, as well as its spending on selling, general, and administrative expenses to better assist the company's ops teams in their work and prepare it to go public.

Given that background, the most important financial investment aspect is what lies ahead. With this company expanding and vigorously developing its production facilities, I am highly encouraged by its strong balance sheet, which should give it much flexibility to execute its development plans. Further, the company has entered into a partnership with BMW, which I believe will be a significant tailwind for the commercialization of its products. In addition to these drivers, the company has received financial support from the US energy department, which should go a long way in financing its operations.

With the optimism these major tailwinds offer, it is essential to note that their impacts are not immediate; thus, the status quo matters most in making investment decisions in this company. Currently, the company has some warning signs, which I believe are a concern to any investors. Weighing these factors, I am bullish on the long-term but skeptical about the next two or three years.

Warning Signs

SLDP has traits that, in the past, have been linked to lousy stock performance in the future. Compared to other Consumer Discretionary stocks, SLDP is overpriced, and its momentum is slowing down. Compared to other companies in the Consumer Discretionary industry, the company's 3M Price Performance of -48.58% is significantly below average.

Compared to other companies in the consumer discretionary industry, the firm's EV / Sales [FWD] ratio of 24.74 is much higher than the sector median of 1.11. The above data summarizes the major warning signs of investing in this company.

To add to these concerns is the company's "management gap." Since the departure of Doug Campbell, the company has never found a new CEO to take over; instead, the President of the company took over from him in an interim capacity which I believe is putting a lot of responsibilities on him, something I believe will affect his productivity. Also, the company has agreed that Mr. Jacobs will no longer be the company's Chief Marketing Officer as of February 8, 2023. This leaves them with a deficit of two senior staff, and I believe if they are not replaced very fast, then SLDP performance will be impacted.

What Lies Ahead: Optimism?

Although this company has the above warning signs, the future looks promising. The company's future optimism is supported by several factors, which include but are not limited to the following;

• Strong balance sheet
• The BMW partnership
• Government support
• Strong market Growth

Strong Balance Sheet

SLDP's balance sheet is solid because of the company's low debt level and high liquidity. With a market capitalization of $539.19M and a debt level of $10.05M, the company is nearly entirely deleveraged, requiring just a small portion of its earnings to service its interest and principal obligations. The cash balance of $323.08M is the most intriguing part of the company's finances because it represents nearly 60% of its market value and 32.14X its total debt. Investors should rest easy knowing that the company has enough cash to cover planned capital expenditures [Capex] without issuing additional shares or taking on other debt.

To be precise, based on current projections, they estimate that their aggregate cash investment in '23 will be between $120 and $140 million. They anticipate spending between $70 and $80 million on operations and about $50 million to $60 million on capital expenditures. Most of the capital expenditure will go toward finishing the construction and launching their electrolyte facility. This leaves them with an estimated liquidity of $355 - $375M, which is very strong despite funding the entire year's investment plan and operations.

The BMW Partnership

Under an upgraded Joint Development Agreement , Solid Power has given the BMW Group a license to do research and development on how Solid Power designs and makes all-solid-state cells. Both companies benefit from complementary cell development and manufacturing at Solid Power and the BMW Group to improve Solid power's technology. The BMW Group plans to replicate Solid power's pilot manufacturing lines in Germany and build prototype cells using Solid power's unique technology. Before installing the prototype line, BMW Group employees will cooperate with Solid power to optimize cell manufacturing procedures.

After reaching specific benchmarks, the BMW Group has committed to paying Solid power $20 million through June 2024. The primary business of Solid power, the electrolyte material, is not licensed in the enlarged Joint Development Agreement. Still, the companies will share their know-how in producing all-solid-state electrodes and cells. Solid power anticipates supplying its electrolyte material to the BMW Group for prototype cell manufacture after the BMW Group installs its prototype production line. If this agreement is executed seamlessly, I see it as a significant revenue generator for SLDP, which I expect to improve its earnings. To put it into perspective, the $20 million to be paid through June 2024 is more than the revenues generated in 2022; this shows the impact this deal would have on the company's financials. Further, supplying BMW could likely open up other markets in Germany or other parts of the world, especially from a company that would like to match BMW in the competitive market.

Government Support

The US Department of Energy has announced a grant of over $5 million to Solid power to support the company's research and development of a technology that has the potential to reduce the cost of EV batteries drastically. The Department of Energy (DOE) has allocated $42 million to fund 12 separate projects for the Electric Vehicles for American Low-Carbon Living (EVs4ALL) initiative, including the more than $5 million recently awarded to Solid Power. All twelve of these initiatives aim to fortify the supply chains in the United States that contribute to cutting-edge battery technologies required to power EVs. In my view, this is very supportive legislation which will be a significant tailwind for SLDP. The funding will assist the company in avoiding debt financing, which is sometimes very hard to service, and cushion them from massive cash burn to finance CapEx.

A Growing Market

Among these positive trends, I see the expanding demand for Solid-State Batteries as the most consequential. This, in my opinion, almost guarantees a market for the products SLDP is making and those it plans to manufacture through scale-up expenditures. Additionally, the company's willingness to patent and lease its rights to other industry participants speaks volumes about its optimism during a global market expansion.

The rapid growth of the electric vehicle market has driven the development, production, and sales of batteries, especially lithium-ion batteries. In the meantime, material suppliers, battery sellers, component suppliers, automakers, investors, and others have become interested in solid-state batteries. IDTechEx projects that the solid-state battery industry will expand to $8 billion by 2031 as more companies enter the market and critical milestones are reached.

Investor Position

The main goal of every investment is the returns received over time. With this in mind, the position of investors in this company is important. To begin, SLDP shares have plummeted significantly over the last year, which translates to a loss if one sold today. This is even though, as detailed in a previous section, it appears overvalued. The sharp share decline, which can be attributed to the company's poor earnings, in my view, may persist as the company is not projected to turn profitable for at least three years . I recommend waiting for this stock to dip for potential investors, as it hasn't bottomed yet.

With the company's excellent cash position, existing investors may be expecting the corporation to engage in share buybacks asserting the company's dedication to its stockholders. Nonetheless, the chances of this happening are astronomically small. If its commercialization ambitions are delayed, the firm is likely preparing for future events using its current cash position. According to the CFO, their current cash position is lined up for long-term hedge in the event they are late for commercialization.

Kevin Paprzycki stated,

"Regarding the long-term timeline from a financial perspective, we've begun to model our long-term cash burn should our commercialization timeline shift. I want to point out that we are glad to have such a solid balance sheet. Our ability to manage our cash is really bolstered by our unique business model, which keeps our capital needs lighter than others in the battery space."

In conclusion, the investor's position in this corporation is contingent on the investor's position. Potential investors can wait until the company bottoms out and then enter relatively cheaply to profit from the growth levers mentioned in this study. Existing investors are most likely currently in a losing position, as the company's recovery will take time, but the future appears bright. Considering the company's bright future, I would not propose selling at a loss.

I believe the company will bottom at about $1.95 per share, its 52-week low. At that point, potential investors can consider that the ideal entry point into this company. I concur with the Wall Street analysis that this company will take time before becoming profitable because of its phase in implementing revenue-generating projects. It should be noted that the company is still in its early phases of developing into a full-fledged manufacturing enterprise. Its infrastructure is still expanding, so revenue should slowly materialize for at least the next couple of years.

The company finished putting in its first production line last year. This project aims to make cells for EVs in a fast and similar way to how lithium-ion batteries are made now. This facility is meant to make solid-state cells big enough for EVs. When fully running, it should be able to make 300 large-format sulfide-based cells per week. The next step is to make these batteries and send them to partners Ford (F) and BMW so they can test them. These initiatives and the other projects the company is working on will require at least a few years to mature into stable revenue streams, confirming that the company will probably not post profits for some time.

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