I loved the movie Rocky. The Italian Stallion versus Apollo Creed. The upstart versus the reigning champ. A movie good enough to spark a total of 6 sequels made in Hollywood. And, after the battle of the last few weeks, another clone being acted out right in front of our eyes on Wall Street.
We reached the middle rounds of the fight yesterday, May 9th, when Aqua Metals reported their earnings for the first quarter of 2017. A stock with more than its fair share of controversy surrounding it, investors were watching the report closely for signs regarding the Company’s ability to ramp up and monetize their revolutionary process for recycling lead acid batteries.
Typically, when a company like Aqua Metals starts production at a first of its kind manufacturing facility, they are granted a hall pass. Everyone knows that you don’t flip a switch and start production, even on a tried and proven process, much less on a novel system. No, instead there is a launch process that includes plenty of downtime for tweaking processes, system maintenance, reconfiguration, etc.
It often can take many months, if not years, to get all the kinks worked out in a new facility. The best example of this is Tesla, where it took several years of production blips before they really started to churn out consistent volumes of quality vehicles; and they’re still improving their manufacturing process.
Sadly for AQMS, but happily for those of us who want to pick up more shares, the market doesn’t seem to want to grant them a hall pass. Instead, the Company is under attack from short sellers who claim that their process doesn’t work. The end result being, instead of this quarter being a rather meaningless blip on a long-term roadmap to success, the shares are taking it on the chin today.
Is this scrutiny justified? Not really, in my opinion. The production volume for Aqua Metals in Q1 does not significantly affect their balance sheet, their cash flows or the long-term prospects of them disrupting a $22B industry. But, my opinion is rather meaningless in this regards; the market is going to scrutinize this quarter and, since certain metrics were not hit, we get to see another short attack and price decline. This all is happening regardless of the long-term fundamentals that truly drive the Aqua Metals story.
He Said, She Said…
Aqua Metals’ shares right now are caught in middle of two schools of thought. On one side of the ring, you have the Company telling us that things are moving forward swimmingly, don’t worry it’s derisked and it works like a charm. On the other side are the shorts, claiming that the process doesn’t work and will never ramp.
Who does one believe in this argument? The shorts, “there is ZERO revenue in Q1 after they said they were in production!” Or, the Company, “we are booking revenue in the current quarter.”
Or this argument…the shorts, “the process has yet to be proven at scale.” To which the company replies that they have “derisked” the process, it does indeed work, and they are now hiring shifts 3 and 4 as they ramp up production.
And, finally, the last and most important one. The shorts, “the company is lying.” CEO Clarke, “we are on target for 120 tons per day by year end.”
Here’s the bottom line; if the Company is correct in all their statements, the stock is a steal. If the shorts are correct, sell now.
Time Reveals All…
For the company, the next three months are about continuing the execution of their scale-up. For the shareholders, however, the next three months are incredibly important. From now through the next earnings call the debate will likely rage on between the Company and the Shorts. There will likely not be a knockout blow delivered by either side.
But, like any good street brawl, you’ll be able to see how the tide is turning long before the fight is officially over. Here are the important events to look for as we progress through the middle rounds of the brawl.
- Analyst/Investor days. Aqua Metals is opening the company up for inspection to analysts and investors. The results of these due diligence excursions will be readily apparent in both price action of the stock and the written reports that come out of the analysts. AQMS is like Rocky sticking his chin out to Apollo Creed…take your best shot, I can handle it.
- Announcement of 2nd site and financing. If Aqua Metals can demonstrate that banks are willing to lend to finance a new facility, the shorts will be in deep trouble. The bear story is that it doesn’t work and they’ll need more equity. Simply put, no one would lend them $50MM if it doesn’t work and, if they get that money, they don’t need more equity. A loan for a piece of this is positive, but not as much so…having no announcement by the end of the next earnings call would be disappointing to investors.
- Volume/Sales/Guidance. If we’re still unsure post the above potential catalysts, the next earnings call will be hugely important. Aqua Metals is claiming revenues, a working process and being on track to hit 120 TPD by year end. Now, they also claim to be continually working on the process (which makes sense), so we don’t know what sort of revenue or production they will hit. We do need to see substantial evidence of success, however, or the stock will get hit. Keeping the forecast for 120 TPD by year end, while demonstrating decent revenues and volumes, would be the death gong ringing for the shorts.
I remain “Relentlessly Bullish”…
In a recent Seeking Alpha article, I was referred to as such. I think it’s an accurate assessment. Aqua Metals is a unique opportunity both as a company (disrupting and cleaning up a messy business) and as a stock (bringing new tech to a $22B industry).
As long as the Company’s process works, this stock will remain my largest holding. If, however, Aqua Metals fails to deliver on their promises, I’ll need to reevaluate my stance. I bought shares today on the weakness generated by short term investment decisions based on the Company’s first ever quarter of production…an erroneous trading philosophy in my mind.
Over the next three months the shares should be quite volatile as the debate will be ongoing between Clarke and the short sellers. We could very well get an indication as to who is winning during this time. Either way, come the next conference call, it becomes put up or shut up time for AQMS. Rocky Balboa took Apollo’s best shots, then bounced off the canvas to knock him out. I’m hopeful that Clarke and AQMS can follow that same path.