From Wind Power To EVs: How American Superconductor Is Harnessing The Green Transition

The global shift towards a sustainable, decarbonized world is transforming entire industries and paving the way for new market leaders. Companies strategically positioned to address this monumental change stand to benefit immensely. Enter American Superconductor Corporation (NASDAQ:AMSC), a firm at the confluence of these transformative trends, aiming to set the gold standard in the ever-evolving energy and technology landscape.

Understanding the Larger Landscape:

Before diving deep into AMSC's prospects, it's crucial to contextualize the broader energy transformation underway. The U.S. Energy Information Agency data sheds light on a rapid shift: U.S. wind power generation catapulted from a mere 6 gigawatts in 2003 to over 140 gigawatts by 2020. Simultaneously, photovoltaic power generation, which was almost nonexistent in 2003, reached approximately 125 gigawatts by 2022.

This is not a standalone phenomenon. The transport sector, too, is witnessing a revolution. The Edison Electric Institute's projections show the number of electric vehicles (EVs) on U.S. roads skyrocketing to 26 million by 2030 from just over 2.5m at the time of the writing of this article. Here's what's more intriguing: A typical electric car needs six times the critical mineral inputs compared to a conventional one. This includes vital components like graphite, copper, nickel, lithium, and cobalt. Meanwhile, in the energy sector, an onshore wind plant demands nine times more of these critical mineral resources than its gas-fired counterpart.

This has profound implications. As the International Energy Agency suggests, the amount of critical minerals needed for new power generation capacity has shot up by 50% since 2010. These minerals are the lifelines of the new energy economy, and as renewables grab a larger share of the energy pie, we're looking at an astronomical surge in demand for these resources.

AMSC's Strategic Vision:

It's against this grand backdrop that AMSC's ambitions and actions should be viewed. The company has astutely identified its growth avenues: renewables, mining and metals, semiconductors, and the military. This selection isn't random; it mirrors the broader trends we just discussed.

Renewables, for instance, are central to the decarbonization narrative. With increasing global commitments to reduce carbon footprints, there's an inevitable gravitation towards renewable energy sources. AMSC's alignment with this trend, as evidenced by its collaborations with Inox Wind and Doosan, positions it as a significant player in the sector. Its association with Inox Wind, especially with the 3-megawatt class wind turbine, and its support for Doosan's 100-megawatt offshore wind farm, showcase AMSC's prowess and adaptability. The revenue trend with Inox Wind must be highlighted. While this is a welcome revenue stream, we can see that the introduction of the wind option mechanism in 2017 has made a noticeable impact.

Leadership is, however, bullish about the growth prospects for future wind installations in India, expecting unit growth to more than double by 2030 which would represent roughly an 11% compounded annual growth rate from 2022.

The next important segment is mining and metals. While often overshadowed in the public discourse by the flashier renewables, they are no less critical. As the thirst for EVs and renewable installations grows, the underbelly of this transformation—the critical minerals—will experience unprecedented demand. Companies like AMSC, which recognize this underlying trend, are strategically positioning themselves to capitalize on it.

The company's association with the U.S. Navy, particularly in ship protection systems, speaks volumes about its technological capabilities and the trust it has garnered. Having secured contracts for the San Antonio-class LPD's protection systems, AMSC is demonstrating not just its product diversification but its ability to cater to high-stakes, precision-demanding clients.

The emphasis on semiconductors and military applications further underscores AMSC's multidimensional growth approach. In an era of technological convergence, semiconductors have become indispensable, playing a pivotal role in everything from advanced electronics to renewable energy systems. AMSC's vision here is clear: to provide cutting-edge solutions tailored to these burgeoning sectors. Investors should pay keen attention to broader trends in the sectors as they will likely determine the company's future. It is easy to identify that there will be an emphasis on renewable energy and semiconductors in the future, but new trends like, for example, increased spending by the US military due to the war in Ukraine could provide important revenue streams in the future if the required replacements of equipment transferred to the Ukrainian government ever lines up with services provided by American Superconductor.

It would be fair to argue that the company is well-positioned in key business segments despite its relatively small size. What remains to be seen is how the company can drive growth going forward as those markets are becoming more competitive as companies begin to see the truth about the global shift to renewable energy sources and all that it entails.

The Road Ahead:

Starting 2023 on a robust note, AMSC seems poised for greater heights. Their ambition isn't just to expand but to deepen their market roots, focusing on collaborations, innovations, and product diversification. Their commitment to harmonizing the world's push for decarbonization with the demand for efficient power delivery showcases a balanced, holistic view of the global energy landscape.

What's particularly refreshing is AMSC's self-awareness. The company has transitioned from being a material science company to a manufacturer of fully integrated systems. This evolution signifies a journey towards higher value addition and meeting market demands head-on.

But there are some concerns that need to be addressed. As of right now, AMSC is a loss-making company and has been for some time now.

This has had an effect on the company's cash reserves. This is not what you want to see going into what you potential economic slowdown and US election that could have a direct impact on the country's renewable energy policy. The cash balance is the lowest it has been for some time, and it would be fair to say that leadership may need to raise cash in the future unless there is a dramatic turnaround.

The other data point that investors should be watching here is the EPS beats. The company hasn't done a great job delivering to expectations, but they did beat in the recent report.

The important thing to note is that the general expectation is that the firm continues to lose money in the short to medium term.

Investors will be hoping to see significant margin improvement, but that looks unlikely at this point. It looks like the tremendous margin expansion we've seen from the semiconductor manufacturers do supply chain shortages brought about by the pandemic have been cooling down.

Going forward, the main driver for semiconductors will likely be AI and increased device complexity for already popular devices, an ultracompetitive space dominated by the biggest names in the industry. With respect to the renewable segment, the high growth that some media houses were suggesting years ago has only partially materialized. We have definitely seen improved adoption, but we have not seen ridiculous margins across the industry, nor have we seen the dominance required by one major player to pick a clear winner. Instead, renewable energy is turning out to be quite competitive, which will likely limit the much-needed margin expansion.

The Takeaway

Navigating the intricate maze of the modern renewable landscape, American Superconductor Corporation emerges as a quintessential example of strategic evolution and adaptability. Their embrace of an eco-centric future, combined with technological innovation, is commendable. But let's not romanticize; the path ahead isn't a stroll through a sunlit grove. It's more akin to a high-stakes tightrope walk, with gusty winds and a shifting balance.

The data is undeniably illustrative. The leaps in wind and photovoltaic power generation underscore a global green transition. Yet, the EV revolution and the consequent surge in demand for critical minerals paints a picture of an increasingly interconnected and complex market. Amid this, AMSC's choice of focus areas – renewables, mining and metals, semiconductors, and the military – reveals a deliberate attempt to position themselves across the value chain of this new world.

Here's the paradox. While AMSC's vision aligns with the winds of change, its financials suggest turbulence. A continued streak of losses, dwindling cash reserves, and an unpredictable political landscape can potentially throw the company off its trajectory. While the recent EPS beat offers a glimmer of optimism, the overall narrative is one of caution. Semiconductors, dominated by industry giants and the tempered growth in renewables, could mean limited room for margin expansion.

So, what's the final word for investors and stakeholders? It's twofold. First, appreciate AMSC's strategic positioning and applaud their foresight. Their transition from a material science entity to a manufacturer of integrated systems captures the essence of growth in a challenging market. However, second, and perhaps more crucially, remain astutely aware of the challenges ahead. AMSC is at a pivotal juncture, and while they are beautifully positioned to harness the winds of change, it remains to be seen if they can convert this potential energy into kinetic returns.

In the great renewable rush, AMSC could emerge as a dark horse or be overshadowed by larger stallions. Investors, while being optimistic, should tread with a mix of hope and pragmatism. After all, in the ever-evolving world of renewables and tech, the only certainty is change itself. With that said, there is no great reason to rush to my right now, but investors shouldn't be running for the exit door just yet. The leadership team is improving this company, and there is no question about it. Apart from possible equity raise, there really isn't much to be afraid of fear. I rate AMSC stock as a hold.