When Westport Innovations (NASDAQ:WPRT) debuted on the U.S. stock exchange in 2008, the market scrambled to get its hands on the shares of a company that owned a disruptive natural-gas engine technology having the potential to revolutionalize the American transportation system. By early 2012, investors who bet on Westport back in 2008 were sitting on neat 275% returns.

Unfortunately, it turned out to be the high-water mark for investors. The market soon became wary of the red ink on Westport's books that refused to budge. Natural gas as a transportation fuel didn't take off as expected, and Westport stock crashed – It has shed nearly 67% since hitting an all-time high in March 2012. 

WPRT data by YCharts

So is Westport Innovations a lost case? Not quite. While the company continues to face several risks, here are three reasons why the stock may have left the worst behind.

It's turning around

Westport is yet to turn a profit, but its last-quarterly report confirmed that the company is turning around.

Westport's operating business units combined -- Applied Technologies, On-Road Systems, and Off-Road Systems – turned adjusted EBITDA positive during the second quarter, a goal the company had hoped to achieve by the end of 2014. Adj. EBITDA is net income (loss) excluding expenses like interest, tax, depreciation, amortization, forex gains or losses, and other non-cash items. The three units swung to adj. EBITDA of $1 million in Q2 from an adj. EBITDA loss of $8.9 million in the year-ago period. Here's a chart depicting Westport's journey to that milestone.

Source: Westport Innovations Corporate Update Presentation

Investors should note that aside from the three business units mentioned above, Westport runs a fourth unit which invests in research and development programs. Since that spending is included in the numbers, Westport's consolidated business is still in the red.

But here's the good news: Westport now expects to turn consolidated adj. EBITDA positive by the end of next year, and I wouldn't be surprised if it hits that milestone sooner for three reasons:

  • A growing top line – Westport clocked 26% higher year-over-year revenue for the six months through June.
  • Strong business with joint ventures -- Westport's long-standing partnership with engine maker Cummins and China-based Weichai count among its biggest strengths. Sales from the two ventures combined grew  an annual compounded average rate of 69% between 2010 and 2013.
  • Cost control – Westport's operating expenses for the six-month period fell 12% year over year, indicating aggressive cost cutting by the company.

So while Westport's journey to profitability could still be a long one, the fact that it has achieved its operational adj. EBITDA goal ahead of target speaks a good deal about management efficiency. And strong management is one of the most important steps toward success.

Westport is a growing company

After establishing its presence in North America, Europe, and China, Westport is now targeting high-potential markets like India and South America.

For example, Westport joined hands with India's leading automobile company, Tata Motors, to launch a spark-ignited engine earlier this year for commercial vehicles. Westport's technology has already made its way into most of the CNG models offered by India's biggest passenger car company, Maruti Suzuki, including its latest runaway hit hatchback, Celerio. Here's some fuel for thought: Consulting firm RNCOS projects sales of CNG (compressed natural gas) cars in India to grow at a compounded rate of 31% between 2013 and 2018.

But tapping global markets is just one aspect of Westport's growth plans. The company is expanding its list of partnerships and extending its product applications with as much vigor. Caterpillar, Ford, Tata Motors, General Motors, and Volvo are just some of the companies that have put their weight behind Westport's technology; and that list is good enough to substantiate its feasibility and sustainability.

Westport is also taking its expertise beyond trucks and buses. In fact, the often-overlooked off-road market, which covers vehicles in mining, rail, marine, construction, and gas exploration industries, could be a potential game-changer for the company. The shift is already under way: Oil and natural gas producer, Pioneer Natural Resources, for example, is planning to convert its entire fleet to natural gas by next year.

Pioneer Natural Resources is relying heavily on Westport Innovations' technology to convert its fleet to natural gas. Source: Company presentation at 2013 Natural Gas Now Event, hosted by Westport.

There are several similar stories playing out there, all of which are win-win for Westport. Long story short, Westport is exploring every possible natural-gas fuel market today to secure its future.

Natural gas market is heating up

Perhaps Westport Innovations' business potential continues to be the biggest reason to invest in it. The transition to natural gas may not be an overnight story, but the story is as strong as ever.

Estimates suggest that the number of natural-gas vehicles in use worldwide has grown at 15% clip annually over the past decade. That's an impressive number, which looks poised to grow bigger with time.

So why is natural gas gaining attention? According to Clean Energy Fuels (NASDAQ:CLNE), natural gas emits nearly 30% lower greenhouse gas emissions, and is $1.50 per gallon cheaper on an average, compared to diesel and gasoline. Now this is what fleet operators need now, especially with global emission standards getting stricter.

The next obvious question is: How big is the opportunity? While that's difficult to quantify, here's a quick look at how much fuel key vehicle markets currently use every year, courtesy of Clean Energy Fuels:

  • Heavy-duty trucks: 25 billion gallons
  • Transit buses:1-1.5 billion gallons
  • Airport vehicles and refuse trucks: 2 billion gallons each
  • Marine: 6 billion gallons
  • Rail: 3.6 billion gallons
  • Mining: 1.6 billion gallons

Clean Energy Fuels is witnessing rapid growth in the natural-gas truck market. Source: Company website

Now if natural gas were to displace even a fraction of all that fuel consumed, you can imagine the massive opportunity that Westport Innovations will be sitting on, especially as a first-mover in the market.

Watch out for the market with the highest potential: the trucking industry. During its last earnings call, Clean Energy Fuels CEO and President, Andrew J. Littlefair highlighted  how "the number of trucking fleets that are either testing natural gas trucks or increasing their current count is rapidly expanding."

Foolish takeaway

Westport's losses may turn off investors, but it looks like a compelling story for those willing to wait. Of course, the investment comes with its share of risks -- some that I will discuss in a later post -- but the downside in Westport stock appears limited, given its precipitous fall despite the company's growth potential.