Company Snapshot
American Superconductor Corporation (NASDAQ:AMSC) is a small-cap stock that is primarily noted for its power control systems which seek to address and alleviate some of the complexities associated with various energy-related applications.
The company currently reports under two divisions- Grid and Wind. Within the former, AMSC provides transmission planning services, power electronics, and superconductor-based systems. AMSC also has a fledgling portfolio of technology solutions that are designed to power and protect the US Navy’s fleet which now comes under the Grid portfolio.
As part of its wind portfolio, AMSC provides power electronic and control systems, licensing of engineering designs, and support services for turbine manufacturers.
Earnings Headlines Look Impressive, Particularly On The Top-line Front
On January 24, AMSC published its Q3-24 results (the company follows a March year-ending calendar) after the closing bell. As far as the headline bottom-line numbers go, it appears that AMSC has turned a corner. Prior to the June 2023 quarter (Q1-24 for AMSC), the company had missed bottom-line estimates for five successive quarters, but including yesterday’s results, it is now three quarters in a row, where they’ve either met or beaten street estimates.
After having reached break-even levels on a normalized EPS basis in Q2, AMSC was expected to slip back into the red in Q3 with management previously stating that the EPS wouldn’t be worse than -$0.15. Well, AMSC ended up delivering a much better figure of -$0.06, but do note that this was in line with what the sell side was expecting. On a non-GAAP basis, AMSC was expected to post a loss per share of no more than -$0.08, but encouragingly enough, they actually ended up delivering a profit per share of $0.03!
Moving over to the topline, note that in Q2, AMSC had delivered healthy enough topline growth of 23% YoY, but if you thought that growth figure was decent, how about the Q3 revenue growth rate which came in at a whopping 65%? Admittedly, AMSC was always going to improve the YoY growth rate in sales from Q2 to Q3 as management had guided to a similar revenue run rate as Q3 last year had witnessed a sequential decline of 14% a year ago), Yet AMSC was only expected to deliver revenue growth of 40-50% in Q3 and ended up delivering around 1500bps more than the top-end of the expected range.
A Few Other Notable Themes
When prospective investors gauge AMSC’s fundamentals, a few of them may be put off by the fact that the company had never generated any positive operating cash flow until recently. However, do consider that there has been sequential progress on this front across every quarter since June 2022, and in Q2-24, the company finally managed to eke out a positive operating cash flow of around $0.9m.
In the recent Q3, the operating cash flow (OCF) performance was even more impressive as AMSC generated around $1.3m. On a 9M basis, AMSC is still not cash positive (-0.1m), but given the progress seen over the last couple of quarters, investors can be all but certain that the FY OCF number will be cash positive.
Our confidence in the OCF progression is backed by management’s previous commentary where they’ve stated that they could attain positive OCF so long as quarterly revenues came in over the $35m mark coupled with a gross margin threshold of 25%.
Revenues are expected to remain solid (management is guiding to $36-$40m in Q4), as the company has witnessed solid progression with its order backlog now at $137m growing at 25% on an annual basis, and 7% on a sequential basis. This implies that even if AMSC fails to grow its backlog from current levels (which is an outlandish assumption) it could still deliver a minimum of $34 of sales per quarter over the next four quarters, not to mention some of the service-related recurring components that will also come with the installed base of AMSC’s product portfolio.
Then on the gross margin front, note that since bottoming out in Q3 last year, it has continued to make sequential progress in every quarter since, and even in Q3, there was a slight 20bps QoQ improvement.
The improved product mix has played a part in this, but we’ve also seen AMSC levy price increases last year, the effects of which are still leaving a positive mark. Having said that, with the gross margins now at previous cycle peaks of around 25%, investors would do well not to expect substantial expansion from these levels.
An important corollary of investing in AMSC is that it gives you indirect exposure to India’s growing wind energy market. Note that this is a market undergoing plenty of reforms with the refurbishment of old turbines currently underway, and the government there also looking to issue at least 10GW of wind tenders annually through the next five years!
AMSC recently signed a follow-on order for turbine electrical control systems (ECS) worth $8m with Inox Wind Limited, the shipments of which will take place all through this year. For the uninitiated, AMSC serves as Inox Wind’s exclusive supplier of ECS for 3MW class wind turbines. Inox itself has signed some pretty ambitious projects that will need to be delivered by June 2025, so don’t rule out the prospect of AMSC benefitting from further follow-on contracts as well.
Closing Thoughts- Stock-Related Considerations
As noted earlier, on a GAAP basis, AMSC is not yet profitable (consensus positioning suggests that this will linger through FY26), so we’re using the forward price-to-sales metric to gauge AMSC's valuation quotient at this juncture.
As things stand, AMSC is no longer cheap, trading at a slight single-digit premium relative to its 5-year average multiple of 2.24x but do note that you’re getting pretty hefty topline growth for that lowly multiple. As per consensus numbers, AMSC is poised to deliver impressive annual topline growth of 25% for the year, although this will likely be lifted higher in the coming days given the strong topline performance in Q3.
One emerging facet that investors ought to be aware of is the fact that the AMSC stock has become a lot more volatile of late and may not necessarily appeal to investors with a conservative mindset who are looking for stable offerings.
Moving over to the charts, note that over the last year, AMSC's stock has been trending up (whilst offering useful pullbacks every now and then) in the shape of an ascending broadening wedge on the weekly chart.
What’s also been encouraging to note is that during the uptrend, we’ve also seen a decent level of institutional participation (net shares owned are up by 5%), even as the short-sellers have run for cover (percentage of float that is short has come off by over 300bps since September). This reflects well on the quality of the uptrend.
Now considering where the two boundaries of the wedge are currently placed ($16 and $8), we think an entry at current price levels ($9.75) provides an attractive reward to risk of over 3.5x.
However, before you jump the gun, may we also state that we don't think AMSC is best positioned to benefit from any rotational momentum from those who are looking for beaten-down opportunities in the clean energy space.
The chart below highlights how AMSC’s relative strength ratio versus other clean energy offerings has already mean-reverted to the mid-point of its long-term range. Note that the ratio has also generally been trending lower over the last 10 years or so in the shape of a descending channel (two blue lines) and now it is not too far from hitting the upper boundary of the channel.
The Alpha Sieve
Investment research, primarily oriented towards uncelebrated/under-covered stocks and ETFs, across North America, Europe and Asia. Seeks to combine both fundamental and technical disciplines while making an investment/trading proposition.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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