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Last week I went over the three best reasons to buy American Superconductor (Nasdaq: AMSC ) right now. Improving financials, a potentially game-changing lawsuit, and the growth of the renewable energy market made my list of buy signs. But there are a lot of reasons to be cautious about the company right now. We're still only a year removed from the stock's collapse and there are very real dangers ahead.
Below I've outlined the three best reasons to sell this stock along with a CAPScall on the stock as well.
Very real bankruptcy concerns
In the first three months of 2012 American Superconductor lost $21.2 million on just $28.6 million in revenue. The net loss is expected to come in under $13 million in the second quarter on more than $26 million in revenue, but we're still not approaching profitability.
The company will cite $300 million of backlog as a great sign for the future, but investors have no idea when that backlog will turn into real revenue. Meanwhile, the balance sheet only gets worse.
A year ago the company had $239.9 million in cash and marketable securities, a figure that had declined to $51.6 million in the last quarter. This has forced the company to raise funds of $35 million in recent months from the debt market, a place the company has previously avoided.
The added cash will help the company survive for the time being, but when you're reporting $10 million or more in losses each quarter, cash and financing dries up quickly. If the company's lawsuit against Sinovel isn't successful, it will also sink more cash into paying lawyers to litigate for little gain. American Superconductor is walking a tightrope right now and it needs revenue to improve quickly if it is going to avoid bankruptcy for much longer.
The wind market that generates most of American Superconductor's revenue is struggling at the moment, and there are bigger players than American Superconductor trying to keep their place in the market. General Electric (NYSE: GE ) , Siemens (NYSE: SI ) , Vestas, and Sinovel are four of the largest firms in the industry and they all have the capability to develop new wind turbines themselves. American Superconductor is trying to be a player by providing technology and parts to up-and-coming players like Inox Wind, Doosan, and JCNE. As the wind market has gotten more competitive, all companies have struggled and those who are trying to enter the market are at a competitive disadvantage.
The same could be said for the Gridtec Solutions business the company is trying to grow. It is making voltage stabilizers, grid connections, superconductor cables, and a host of other parts for the renewable energy market, but everyone else has their eyes on this space as well. GE and Siemens are just two of the major players and no one is going to give up their position easily.
The same could be said for inverters, where American Superconductor is trying to crack the market. Power-One (Nasdaq: PWER ) , Enphase (Nasdaq: ENPH ) , and Satcon are already major players in the inverter market, and they along with a host of suppliers will make the market extremely competitive going forward.
Little competitive advantage
What advantage does American Superconductor have over competitors like GE or Siemens in wind? The company doesn't make actual turbines, it relies on other companies for demand, and it is supplying a market that's already flooded with supply.
We've seen from the theft of its intellectual property that customers only need to unlock the key of the company's technology to make it themselves. New customers may not steal it the way Sinovel allegedly did, but if they're able to grow large enough to build their own R&D facilities, why would they need American Superconductor?
In the grid market, the company is making electrical products that are only marginally different than competitors'. With dozens of inverter suppliers and major electronics producers to compete with, where's the advantage?
Foolish call on American Superconductor
I currently own long-dated call options in American Superconductor but I just can't give the stock a thumbs-up right now. It has too much to prove and too far to go to be a great investment. There is big-time upside if its lawsuit is successful (which is why I own long-dated calls), but owning the stock is risky. I have to give the stock an underperform call today in my CAPS portfolio. You can find the rest of my picks here.
If American Superconductor is not the stock for you, maybe General Electric is worth another look. The Motley Fool has a new premium report detailing everything you will need to know about GE and its great international growth story.