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Tickers in this Article: AONE, HEV, GE, JCI, NAV
Just because investors say that they expect and accept that there will be volatility and setbacks with emerging technologies and the companies behind them, that does not mean that they will not punish offending stocks anyway. As A123 Systems (Nasdaq:AONE) announces another disappointing quarter and some commercial setbacks, investors appear ready to take the stock out to the woodshed one more time.

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A Challenging Quarter
Although A123 met the consensus estimate for revenue this quarter (up about 11% to $26 million), it seems unlikely that anybody will care about that number. The company is still a pre-commercial company for all intents and purposes, so it is not a relevant figure.

What is more relevant is the company's report of a higher gross loss - sales rose about $2.6 million, but the gross loss worsened by $1.2 million to a loss of $3.1 million. The company had some yield issues and that led to higher expenses, but it brings to mind the old joke, "we lose money on every sale, but we'll make up for it with volume".

More seriously, the setback will feed the bears who are betting on the idea that A123 cannot profitably scale up its manufacturing process to meet the demand that investors are counting on in the future. While it can just as easily be argued that all new technologies have kinks in the initial production phases and that it is better for a company to work them out before getting large orders, the market is likely to take a "show me" attitude in the meantime.

At the bottom lines, A123 posted a net loss of nearly $44 million for the quarter, and ended with $301 million in cash on the balance sheet, down $52 million from the June quarter.

The Road Ahead
While some of the likely punishment of A123's stock will come from those production yield issues, other investors may be concerned about the announcement that three customers pushed back their orders. It is not an uncommon issue in new markets - Ener1 (NYSE:HEV) has had orders slip as well - but investors are nevertheless jittery about whether there will be enough business to fill A123's planned battery capacity for 2011.

On a more positive note, the company did announce a supply deal with SAIC, a major Chinese automaker. That goes into the file, then, alongside other relationships with BMW and Navistar (NYSE:NAV), as well as the company's long-term relationship with General Electric (NYSE:GE).

The Bottom Line
GE is a very good friend and corporate ally for A123 to have, but it does not provide a guarantee that the company will beat Johnson Controls (NYSE:JCI) or its other battery rivals in getting the largest number of deals and actual cells in cars on the road. The company's technology is promising; it seems to do well in high-discharge applications and the lithium iron phosphate electrode seems more stable (and runs cooler) than lithium cobalt oxide, even if it does store somewhat less energy. Ultimately, though, science is just part of the equation. A123 has to convince would-be customers that they can reliably meet supply needs as a new company - where Johnson Controls and LG Chem have been at this for years. A123 also has to be able to compete on price.

As the past few months have shown, investors in A123 need to have patience, a strong stomach for risk and a long-term horizon. By no means has the market decided on the winners in the electric vehicle battery market, and A123 is still very much in the running. If A123 can deliver the goods and investors can hang on through the ups and downs, the rewards to both could still be considerable. (For a related reading, see Analyzing Auto Stocks.)

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