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You're forgiven if you never heard of A123 Systems (Nasdaq: AONE  ) before. The battery fabricator is still a mere pup, working in an industry where economies of scale add up very quickly. Until order volumes pick up in earnest, A123's gross margin is negative. Conservative investors can go elsewhere -- this is more of a stock for the Rule Breakers and Motley Fool Hidden Gems crowds.

In the just-reported second quarter, A123 saw sales bubbling up from $19.7 million last year to $22.6 million this time around. Given the early stages of this business, and the wild swings in each of its reportable segments, the jump could just as well have gone in the opposite direction. Lumpy sales are a fact of life on these small scales. Net losses added up to $34.2 million -- yes, the loss was bigger than total revenues -- or $0.33 per share, which was tougher than the $21.9 million loss seen a year ago.

So how about those economies of scale? A123 is building out its manufacturing capacity something fierce, hoping to have as much as 1,000 megawatt-hours of annual battery-making capacity online by the end of 2011. For those keeping score at home, that would be enough to support more than $650 million in annual revenue, and it's a drastic improvement from current run rates. That's the kind of scale the company needs in order to turn a profit.

There is a lot of competition in the rechargeable battery space, chiefly from Panasonic (NYSE: PC  ) which is spending more than $4.6 billion to take control of market leader Sanyo. But as the only pure-play battery specialist positioned at the crossroads of electric/hybrid vehicles and smart power grid projects, I can see A123 growing into those much larger breeches. Management sees "market opportunity that is expected to grow to tens of billions of dollars annually over the next several years," and it wouldn't take much of a slice out of that enormous pizza to get the good times rolling for A123.

Automotive partners already include Chrysler, BMW (OTC BB: BAMXF.PK), and Navistar (NYSE: NAV  ) , while energy grid customers include AES (NYSE: AES  ) and a Californian subsidiary of Edison International (NYSE: EIX  ) . Ramp up the manufacturing capacity, and I'm sure that new customers will come.

Electric power is the new little black dress, and unless A123 burns through its entire cash hoard before getting to the big time, this should be a market-beating winner over the next four to six years. There's more than $400 million left on the balance sheet, and the cash burn isn't all that horrific anymore. I'm putting my CAPS rating where my mouth is, and rating A123 a long-term market crusher in CAPS. Feel free to join me, whether you agree wholeheartedly or think I'm insane.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. He wishes someone would make batteries charge quickly enough to reap energy from lightning strikes -- that would be a killer product here in the lightning capital of the Western Hemisphere. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2010, at 10:41 AM, dtravi wrote:

    Im under the impression based on DD that A123 has the best technology out there at this time and that the reason they were left out of the Chevy Volt and Nissan Leaf is not because other battery companies' batteries had as good or better energy density or safety and other performance characteristics but rather A123 did not have the manufacturing capabilties to quickly start mass producing and redesigning the shape of their battery to fit into an auto. This is where they are going, I presume, with the furious cash burn. DT

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