Last Friday, I drew attention to the seemingly lofty valuation of A123 Systems (NASDAQ:AONE), which has yet to achieve positive cash flow, and yet sports a market capitalization greater than any of the following companies:


Sales (in Millions)

Earnings Before Interest and Tax (in Millions)

Anixter International



Columbia Sportswear



Holly (NYSE:HOC)



Manitowoc (NYSE:MTW)



Panera Bread (NASDAQ:PNRA)



Titanium Metals (NYSE:TIE)



Data from Capital IQ. Figures are 12-month trailing results.

In response to my article, several of you urged me not to get too hung up on standard valuation ratios like enterprise value-to-sales and price-to-earnings. After all, this is a young company in a revolutionary new industry with massive growth potential. Now where have I heard that sort of reasoning before?

Another reader compared energy storage -- the area of A123's expertise -- to refrigeration, in that it will be both ubiquitous and game-changing.

That's an interesting analogy, and quite close to the one employed by James Grant in an old column entitled "The Economic Consequences of Air Conditioning," reprinted in his new book Mr. Market Miscalculates. This is an excellent opportunity to both plug Grant's book, which is stellar, and challenge a certain line of thinking with regard to hot growth industries.

In his article, penned during the bubbly summer of 1999, Grant draws a parallel between the rise of the Internet and the rise of air conditioning. He notes that "[r]evolutions, once begun, rarely proceed as the revolutionaries intended, and the chief beneficiaries of new inventions are not always the people who dreamt them up, invested in them or promoted them."

Grant then introduces us to Willis Haviland Carrier, the original A/C patent holder, and the company bearing his name. Carrier Corp., which was acquired by United Technologies (NYSE:UTX) in 1979, remains the world leader in air conditioning equipment. That's an exceptional demonstration of staying power, which I would largely attribute to the low rate of technological change in the industry. Even as it clung to this No. 1 industry ranking, however, Carrier still didn't outperform the Dow Jones Industrial Average over 50 years as a public company.

While A123 could very well become a runaway success, as First Solar (NASDAQ:FSLR) has in its own hot growth industry, investors should think long and hard about the degree to which the benefits of the energy storage revolution will accrue to them, rather than to utilities, consumers, and other stakeholders.