Valence Technology (NASDAQ:VLNC) tries to generate cash by plowing huge sums of money into "phosphate-based lithium-ion technology." This confusing string of words basically means that the company can take a laptop or cell phone battery and safely make it more powerful. The resulting battery can power anything from a hybrid vehicle to an electric utility's backup generator.
While lithium ion batteries don't last much longer with constant use, their shelf life, when compared with a traditional alkaline battery, is excellent. In fairness, they're not altogether too useful in an everyday context, because the higher price sometimes doesn't make the technology worth it.
But has Valence been able to turn its technical expertise into an economically competitive product? The fourth-quarter earnings report released yesterday settles the debate quickly. The total loss for the quarter came in at a staggering $9.2 million, slightly below the loss of last year's Q4. For the year, the loss was even worse, a value-destroying $32 million.
Valence sports a market cap of $250 million. A quarter of a billion dollars for a company with 2005 revenues of $10.7 million and losses of three times as much -- $32.7 million -- demands large and very reliable future sources of profit. Unfortunately, Valence doesn't seem to have the products to guarantee its future profitability. And when you're bleeding red and priced at 23 times 2005 revenues, it helps to have a clear source of future income.
The company has had moderate success with its N-Charge stand-alone power source, available through Best Buy (NYSE:BBY), Circuit City (NYSE:CC), and other distributors. Valence says the N-Charge's portable battery pack can power a user's laptop for five to 10 hours.
Aside from the N-Charge, the company also produces long-range batteries for Segway human transporters, has a resale agreement with Tyco (NYSE:TYC), and provides batteries for a small number of hybrid ATVs. While these other projects are interesting, they have not been significant enough to put the company into the black.
But despite the potential, given its cash burn status, Valence is a speculative play that investors would do well to pass on. If a tech company has a proven management team, solid financials, and an excellent competitive position, it deserves consideration. But in the case of Valence, investors should look closely at the historical performance before jumping in and consider leaving this one for the billionaires (one name comes to mind -- financier Carl Berg -- who has intermittently provided the company with, yup, you guessed it, financing).
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Fool contributor Matt Thurmond doesn't own shares of any company mentioned in this article.
