The combination of overheated expectations and market weakness in Europe and Asia has done a real number on energy technology names ranging from wind power to solar to batteries. With declining revenue momentum in ultracapacitors, lower overall revenue guidance and worries about both emerging competition and sluggish end markets, Maxwell Technologies (Nasdaq:MXWL) has been no exception - dropping almost 50% over the last year. I'm starting to wonder, though, if this isn't a good time to start reconsidering this name. I think investors have been forced towards much more rational market and revenue expectations, and if anything the market may now be undervaluing the company's long-term potential. While this remains a high-risk name with much to prove, sometimes emerging tech stories work better after a lot of the wide-eyed optimism has been washed out of the stock.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Second Quarter Results were OK, But Guidance Didn't Help Matters
Maxwell's reported results weren't too bad - revenue did slip a bit from last year (by about $200,000), but grew 10% on a sequential basis. What's more, gross margin of 42% was not bad at all. Like American Superconductor (Nasdaq:AMSC), another energy-tech play with substantial exposure to Asian wind power markets, Maxwell reported ongoing improvement in this end market. Unfortunately, that's about it for the good news. Management lowered third quarter revenue guidance about 7% relative to the prior sell-side average and guided full-year revenue growth towards the low end of its prior range. What's more, sales growth momentum continues to wane in ultracapacitors - from 53% year-on-year growth a year ago to 30% growth in the fourth quarter of 2011 to 3% growth in the first quarter of 2012, and now down to negative 1% for the second quarter.

SEE: A Primer On Investing In The Tech Industry

Maxwell Needs More Automotive Business
One of the largest "shovel-ready" opportunities for ultracapacitors today is in the automotive industry - particularly in start-stop systems that reduce engine idling time, lowering fuel consumption and emissions. While Maxwell does have a relationship with major auto components supplier Continental AG and automaker PSA Peugeot Citroen, these are not great times for European car makers.

What's more, I think it's fair to ask why companies like BMW, Toyota (NYSE:TM), Mazda, Honda (NYSE:HMC) and Ford (NYSE:F) have all moved forward with alternative start-stop options. While the company has talked about discussions with a Detroit-based OEM, it seems clear to me that the company needs to do a better job of selling car makers and suppliers on the benefits of its approach.

SEE: 5 Reasons Old Tech Is Soaring

Reliance on China Is a Risk Factor
Investors should also be a little wary of the extent to which Maxwell relies on China today. More than a quarter of 2011 sales came from China, largely from the wind power and hybrid bus markets. Although China remains an excellent long-term market for energy/pollution solutions, there's likely to be above-average volatility here.

I'm also a little concerned about rumors regarding one of Maxwell's Chinese partners. Lishen has been a contract manufacturer for Maxwell in China for a while now, but there are stories out there that Lishen is looking to sell its own branded ultracapacitors to Chinese customers and perhaps develop its own electrodes as well. Maybe it's just a rumor with no substance to it, but given American Superconductor's miserable experience with a major Chinese partner and the disruptions that it caused, I don't think the risk can be completely discounted. That said, it wasn't as though Maxwell was going to get a free ride indefinitely; if ultracapacitors have real potential, there will be competitors sooner or later.

SEE: 4 Industry-Changing Tech Trends

The Bottom Line
Wall Street has definitely done a U-turn on this stock. Just six or so months ago, the average sell-side price target was in the low $20s, and now it's just above $9. Say what you will about the worthlessness of sell-side price targets, but it does reflect a significant change in sentiment. That may not be such a bad thing, though. Clearly Maxwell has to show that it can deliver reignited growth, and a major OEM partnership announcement (or two) would not go unwelcomed. Nevertheless, Maxwell currently sports an EV/revenue ratio of about 1.3 - well below the range of multiples common for emerging growth tech stories, even though this company has proven that it can sell its technology and products profitably.

While I realize a discounted cash flow model on a company at Maxwell's stage of development involves massive amounts of guesswork, I nevertheless think these shares ought to be trading in the double-digits ... and if the company can return to high-teens/low 20s growth rates, even more could be in store. Investors should understand that this is still a very speculative story, but in the universe of energy-tech or alternative energy it's at least an idea with solid underpinnings and a real model.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  2. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  3. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  4. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  6. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  7. Technical Indicators

    Key Financial Ratios to Analyze the Mining Industry

    Discover some the most important financial ratios used by investors and analysts to evaluate companies in the metals and mining industry.
  8. Technical Indicators

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  9. Technical Indicators

    Key Financial Ratios to Analyze Airline Companies

    Examine some of the most important financial ratios and performance metrics investors use to evaluate companies in the airline industry.
  10. Stock Analysis

    The 5 Biggest Canadian Oil Companies

    Obtain information about some of the largest and most successful major integrated oil corporations that are headquartered in Canada.
RELATED TERMS
  1. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  3. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  5. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  6. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!