American Superconductor – Transforming Power Solutions (Rating Upgrade) (NASDAQ:AMSC)

When I first covered American Superconductor (NASDAQ:AMSC) in early August this year, I discussed how this small cap growth stock was poised to benefit from the Fourth Industrial Revolution, which I have previously discussed in other articles including this one, Powell Industries: A Growth Stock For The Fourth Industrial Revolution (POWL) | Seeking Alpha. Incidentally, since I wrote the article about POWL in March of this year that stock is up about 90%.

On the other hand, AMSC just reported FY Q2 2023 results and is down more than -20% since I wrote the August piece, which was published just after the stock price popped 60% in one day and then quickly retreated. Nevertheless, the stock is up over 115% YTD and is poised to continue higher.

At the time, I noted that the price of AMSC jumped after news broke of a potential new superconducting compound, referred to as LK-99. This is what I wrote at the time, and the reason why I rated the stock a Hold then.

Not only did AMSC stock pop 60% on Tuesday, presumably due to that recent news, but it has also risen over 50% in the past month. However, all the recent gains have been given up in the past 2 days with the stock back down to below $10, which is where it was trading July 31 before the big jump on August 1. The next earnings report is due on August 9 after the market close, and I rate the stock a Hold pending the quarterly results.

Shortly after my article was published the company reported fiscal Q1 2023 results on August 9. Those quarterly results were good, but not spectacular and the market had a neutral response. This is a summary of the Q1 results from the press release.

Revenues for the first quarter of fiscal 2023 were $30.3 million compared with $22.7 million for the same period of fiscal 2022. The year-over-year increase was driven primarily by higher new energy power systems revenues, versus the year ago period.

AMSC’s net loss for the first quarter of fiscal 2023 was $5.4 million, or $0.19 per share, compared to a net loss of $8.7 million, or $0.32 per share, for the same period of fiscal 2022. The Company’s non-GAAP net loss for the first quarter of fiscal 2023 was $2.1 million, or $0.08 per share, compared with a non-GAAP net loss of $6.8 million, or $0.25 per share, in the same period of fiscal 2022.

Daniel McGahn, President/CEO/Chairman of AMSC had this to say about the Q1 results:

“During the quarter, we booked over $34 million of new energy power systems orders across a diversity of end markets including new military applications, which provide efficient and reliable shore power to naval vessels. We look forward to continued solid momentum as we move into the next quarter.”

Subsequently, FY Q2 results were much more encouraging and as a result I am upgrading my rating on AMSC to a Buy. From the November 1 Q2 earnings call transcript, this is what he had to say about the improved results:

Our business has turned a corner. It feels like we’ve arrived. Over the past several quarters, the business secured an average of $40 million of total orders per quarter. Orders for the second quarter totaled over $40 million, giving us visibility into fiscal year 2024.

The business reported $34M in revenues representing 22.8% YOY growth and had positive quarterly cashflow on a non-GAAP basis for the first time since 2010.

AMSC’s net loss for the second quarter of fiscal 2023 was $2.5 million, or $0.09 per share, compared to a net loss of $9.9 million, or $0.35 per share, for the same period of fiscal 2022. The Company’s non-GAAP net income for the second quarter of fiscal 2023 was less than $0.1 million, or $0.00 per share, compared with a non-GAAP net loss of $6.5 million, or $0.23 per share, in the same period of fiscal 2022.

Furthermore, the company expects to be cashflow breakeven to slightly positive again in Q3 (quarter ending 12/31/23) with net cash expected to be about $24M as of the end of December as shown in this slide from the November investor presentation.

And even though it does not look like much of a pop after the latest earnings report, the stock is up more than 16% since the November 1 report as shown in this 1-month snippet from the stock chart.

While the overall stock market searches for a direction in early November, the price of AMSC has been trending mostly upward with some volatility which is typical of small cap growth stocks.

Growth Opportunities for AMSC

The primary growth market opportunities for AMSC include 4 major markets that represent a combined $700B in 2023 CapEx. There is potential for AMSC to tap into each of those markets with further growth of existing products and solutions.

New Energy Power Systems

The demand for new energy power systems is ramping up across several markets including renewables by connecting wind and solar systems to the grid, for the semiconductor industry by protecting the fab from the grid and protecting from power surges, in mining and materials by converting and controlling power to ensure continuous flow of stable power to the equipment, as well as for military applications.

AMSC produces a variety of power solutions for different end markets as illustrated in this slide from the November presentation.

Again, from the Q2 earnings call, CEO McGahn spoke to this improvement in revenue growth from sales of new energy power systems, including $37M realized during Q2:

“During the second quarter we booked over $37 million of new energy power systems across a number of markets. We ended the quarter with over $128 million in 12-month backlog. We are confident in our business’ performance as we move into the third quarter and are focused on continuing to achieve positive operating cash flow.”

According to the November investor presentation, the company has received nearly $160M in new energy power systems orders in the past 12 months, representing 80% YOY growth.

Ship Protection Systems

Another recent growth segment for AMSC is with the US Navy. The company was recently awarded their 5th contract for SPS for their proprietary LPD systems. In April they were awarded an $8M contract with the Navy for a Deployable Mine Countermeasure System. Overall, the company sees a potential $200M revenue stream from the SPS segment alone.

During the Q2 earnings call CEO McGahn summarized the Navy opportunities and how those contracts are helping to broaden their revenue base:

We are broadening our revenue base with multiple products for the U.S. Navy. We have won a total of 5 Ship Protection System contracts for the San Antonio-class LPD. We’ve delivered and installed 1 Ship Protection System and are currently in the process of commissioning that system. We are delivering our second Ship Protection System this fiscal year.

Wind Energy Control Systems

AMSC offers modernization of wind power systems through technological advancements. In May of this year the company agreed to provide $20M in wind energy control system orders to Inox Wind Limited in India. These newer and more technologically advanced wind turbines are driving demand for AMSC products in this market segment as explained in the press release.

AMSC, a leading system provider of megawatt-scale power resiliency solutions that orchestrate the rhythm and harmony of power on the grid™, and protect and expand the capability of our Navy’s fleet, today announced it has agreed to deliver nearly $20 million of demand for its wind turbine electrical control systems (ECS) to Inox Wind Limited (Inox), including its 2-megawatt (MW) ECS and an order for its 3 MW ECS. AMSC expects to ship these systems over the course of fiscal year 2023.

This is another end market where growth is expected to continue in India at a CAGR of 11% over the next 7 to 10 years where wind power demand is expected to double by 2030.

Although the wind business unit only accounted for 16% of revenues in Q2, it is growing faster than the grid business unit by leaps and bounds in a large and growing market as explained by CFO, Treasurer and Senior VP, John Kosiba on the earnings call:

Our grid business unit accounted for 84% of total revenues, while our wind business unit accounted for 16%. Grid business unit revenues increased 11% in the second quarter versus the year ago quarter and wind business unit revenues increased 177% over that same time period as we are shipping more ECS to our India wind licensee.

Valuation and Risks

Looking at AMSC using the SA Quant ratings, it has high grades in Momentum and Revisions and improving scores in Valuation and Growth. Profitability remains elusive for now, but as mentioned multiple times on the earnings call, positive cash flows are expected in upcoming quarters.

In terms of valuation, the metrics that make the most sense to evaluate include EV/Sales, Price/Sales, and Price/Book since there are not yet positive earnings to report. Relative to the 5-year average most of those metrics are much improved.

Primary risks include the possibility of a global slowdown in renewable energy transition activity and demand for AMSC products as a result. If the wind market in India should start to blow in a different direction for whatever reason, that could impact future sales in that market. The US Navy has been aggressively spending on upgrading the naval fleet and any government funding shortfalls or budget cuts that impact defense spending could torpedo those opportunities.

I do not see a lot of risk to competition because AMSC offers very specialized products in most of the markets they compete in. They have made a couple of recent acquisitions as well (most recently acquiring Neeltran in May 2021), which has helped them to capture market share and realize some cost savings, including as much as $5M annually beginning in Q123.

Summary

In response to a question on the earnings call, this is how Daniel McGahn summed up the progress the company has been making in FY2023:

So we’re winning on — with utilities, we’re winning with mines, we’re winning with things for EV, we’re winning big in semiconductor. I mentioned multiple customers. It’s the first time I’ve said that. We continue to win in renewables. So it’s really across the board. We’ve tried to build this robust, diverse, sustainable business, and we feel like it’s now fully been built and we’ve been able to demonstrate it.

You can sense the excitement in his tone and his remarks, and it seems justified based on the results that they have reported thus far in FY 2023 and based on the expectations for Q3. Those estimates were outlined on the earnings call by CFO Kosiba:

Now turning to our financial guidance for the third quarter of fiscal 2023. We expect that our revenues will be in the range of $33 million to $36 million. Our net loss on that revenue is expected not to exceed $4.3 million or $0.15 per share. Our non-GAAP net loss is expected not to exceed $2.5 million or $0.08 per share. The company expects operating cash flow to be breakeven to a positive cash generation of $2 million. We expect to end the third quarter with no less than $24 million of cash, cash equivalents and restricted cash.

Gross margin in Q2 improved to 25% compared to only 7% in the year-ago quarter. The gross margin was positively impacted by the increase in revenues and a favorable product mix as well as increased service revenues. Operating expenses in Q223 were $9.6M compared to $9.7M in Q222. The company reported a modest non-GAAP net income of less than $0.1 million in Q223 compared to a non-GAAP net loss of $6.5 million or -$0.23 per share in Q222.

With wins across the board and strong momentum going into the company’s fiscal Q3 and looking strong for 2024, I like the stock at the current price below $8 and rate AMSC a Buy for its long-term growth potential. Market volatility could certainly affect the price in the near term as it does with most small cap growth stocks. If we see another market correction or downturn in December or early 2024, the stock price could suffer as a result, otherwise I could easily see the price reaching $10 by the end of 2023.