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Can GM Save A123 Systems?

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Can one car save an entire company? Investors in A123 Systems (Nasdaq: AONE  ) seem to think so. Yesterday, when General Motors (NYSE: GM  ) announced that A123 Systems will supply battery packs for the upcoming Chevy Spark EV, the market lost its mind and jumped back on the electric-vehicle bandwagon again. But is this really a buy sign for the industry?

Not so fast
Before we get carried away, let's review some of the facts about A123 Systems. In August, GM had announced that A123 Systems had been signed on as a supplier for future vehicles, so this isn't exactly a huge surprise. The Spark also won't be available until 2013, assuming no delays, so this really has little impact on the company's near-term financial viability -- something investors should be very concerned about after watching Ener1 take a plunge.

And how excited can we really be about another electric vehicle aimed at the mass market? One analyst estimated that GM could sell 15,000 Sparks in 2013, but the Volt, which should appeal to a wider audience, is selling only in the low triple digits per month. Do we really want to bet that A123 can thrive because of another vehicle like this?

Not to mention that Ford (NYSE: F  ) and Nissan are fighting for the same spot in the market.

To invest or not to invest
A123 Systems is expecting revenue to more than double in 2011 to $210 million to $225 million as electric vehicles begin to ramp up production. That ramp had better come quickly, because in the second quarter, net loss increased to $55.4 million despite higher sales than in the first quarter. With cash of $304.8 million and another $134.6 million of DOE grants yet to be received, the company's balance sheet has some leeway -- but it won't last forever.

A123 needs Fisker, GM, Smith Electric, and others to ramp up quickly and sustain sales -- something we haven't seen from any electric-car company aside from Tesla Motors (Nasdaq: TSLA  ) . This latest deal adds to the company's potential backlog, but count me skeptical that the new demand will be enough to turn around A123's stock price.

The market has yet to prove that electric vehicles are ready to be sold in mass quantities, and by the time the market is ready for them it may be too late for A123 Systems. I'll back up my pessimism by giving A123 Systems a red thumb on my Motley Fool CAPS page, which monitors how the stock performs against the market. Disagree with my outlook? Sound off in the comments section below.

Interested in reading more about A123 Systems? Add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium holds no position in any company mentioned, but he would like to own a Tesla Roadster. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Comments from our Foolish Readers

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 October 14, 2011, at 1:57 PM, h2fcell wrote:

    The real pot of gold for A123 will appear when car manufactures decide to replace lead acid batteries with their lighter, safer, long life, lithium batteries. Will that ever happen? Only time will tell….

  • Report this Comment On October 18, 2011, at 2:20 AM, spectechinvest wrote:

    I don't think GM can save anyone when they can barely save themselves. I recently test drove the Chevy Volt and if cars are headed electric they should just buy tesla's technology.

    Here are pictures and thoughts about the test lease of the Chevy Volt:

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