Aspen Aerogels: The New Patent Is A Game-Changer (NYSE:ASPN)

Aspen Aerogels (ASPN) recently obtained a patent for the use of carbon aerogels in lithium-sulfur batteries. The patent has the potential to disrupt the electric vehicle and sustainable energy markets.

There is still a lot of research needed to understand how much this technology will improve lithium-sulfur batteries and if it will be enough to replace lithium-ion batteries. Even if it does, this change will happen gradually, but the change’s prospect is enough to be optimistic about the company in the long run.

Understanding the patent

To understand why lithium-sulfur batteries could replace lithium-ion batteries, we need to understand how these two technologies compare in the 3 key aspects of a battery for the industry: capacity, price, and the number of cycles of the battery.

Capacity is the amount of energy that a battery can accumulate. Current lithium-ion batteries can accumulate around 200 Wh/kg and have a theoretical maximum of 420 Wh/kg. In comparison, lithium-sulfur batteries can deliver 500 Wh/kg and have a theoretical maximum of 2,500 Wh/kg. Price is another element in which Lithium-sulfur batteries perform better than lithium-ion batteries. Sulfur is one of the most common elements on the planet and is even considered waste in some industries, while lithium-ion batteries use cobalt, which is very expensive.

Where lithium-sulfur batteries fail is the number of cycles they can handle. Lithium-ion batteries can withstand many cycles with relatively small decay, while lithium-sulfur batteries decay fast and can survive very few cycles. This is because sulfur is a bad conductor of electricity, and thus batteries need to use carbon structures to improve conductivity.

Source: Author’s Charts

However, sulfur expands as the battery charges, and this process destroys the carbon structures in the battery. As the carbon structures are destroyed or buried beneath the sulfur, the battery becomes less effective. This process repeats in every charge-and-discharge cycle, which is the main reason why lithium-sulfur batteries are not used instead of lithium-ion batteries.

Source: Author’s Charts

The new Aspen Aerogels patent is for a carbon Aerogel, which could withstand the expansion of sulfur and provide the conductivity it needs. As shown in a previous article, aerogel structures can be very light in weight while maintaining their strength.

Source: Aspen Patent

If the patent claims can be scaled and manufactured for industrial purposes, lithium-sulfur batteries could replace lithium-ion batteries this decade, changing the landscape for electric cars and Aspen Aerogels for good.

Valuation

My past article about the company was in January of this year, and since then, the outlook for 2020 has changed a lot. One of Aerogels’ biggest customers is the oil industry, which was severely affected by the COVID pandemic, especially in the first half of the year. However, besides the pandemic’s impact in 2020, Aspen’s revenue growth forecast for the next four years is similar to what was expected for the company.

The potential increase in revenue because of the new patent is not considered in the “high” side, as it is not guaranteed to happen in the next four years. Instead, the model considers that the patent could reduce the likelihood that Aspen delivers in the estimates’ bottom side and increase the likelihood of delivering on the estimates’ top side.

Source: Author’s Charts

These approximations are in line with Aspen Aerogels’ market expectations in the next couple of years, as the image below shows.

Source: Seeking Alpha

I like to use Peter Lynch’s ratio when valuing a stock. This method uses the ratio between the expected earnings growth plus dividends and the stock’s P/E to determine its fair value. A stock that has a 1:1 ratio is reasonably priced. The higher the number, the more underpriced the stock is.

Source: Author’s Charts

This valuation does not take into account the assets and liabilities of the company. The growth considered in the valuation is the expected growth for the next year, considering iterated growth allows us to analyze better stocks that have uneven growth rates in time.

With this valuation, arguably, the stock is at worst overvalued by 15% and at best fairly priced. So the stock is slightly overvalued.

Source: Author’s Charts

Constructing an adjusted Beta Pert risk profile for the long term, we can calculate the company’s risk profile.

Source: Author’s Charts

The risk profile shows there is an 8% probability that Aspen Aerogels will end up trading at a lower price than today. Considering the potential downside, upside, and the likelihood of each, the statistical value of the opportunity of investing now is 49.6%.

Conclusions

The new patent could deliver a significant result for the stock and drastically change the company’s valuation. While the technology is still in the early stages, some interesting research papers suggest that carbon aerogels could provide a defining breakthrough in this technology.

When we talk about batteries, we need to talk about Tesla (TSLA). Elon Musk and Tesla have been at the forefront of battery innovation for many years. The video above shows the battery advancements that Tesla showcased in the last battery day and how the company stacks up against the most prominent battery types that could replace lithium-ion batteries.

On the Tesla battery day, Elon Musk presented a plan to eliminate cobalt from lithium-ion batteries. The move would substitute cobalt with nickel, so lithium-sulfur batteries would still have a substantial cost benefit against lithium-ion batteries.

Source: Twitter

In a recent tweet, Elon Musk predicted that the company would reach the 400 Wh/kg capacity milestone in about four years, dangerously close to the theoretical maximum capacity of 420 Wh/kg of lithium-ion batteries. But even with that milestone, to reach the industry goal of 300 miles or more on single charge batteries would need a capacity of 580 Wh/kg.

The capacity required for the 500 miles in a single charge promised by Musk would increase the battery’s capacity requirement to about 900 Wh/kg, almost double the theoretical maximum of lithium-ion batteries. The new Tesla battery should not be thought of as a competitor for the lithium-sulfur battery. Instead, this comparison clearly shows how there are physical limitations for lithium-ion batteries that will be reached well before the customers’ car autonomy needs are reached.

If there is anything in this article you agree or disagree with or would like me to expand further, I would sincerely appreciate you leaving a comment. I will address it as soon as possible.

Disclosure: I am/we are long ASPN. 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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