Despite Plunge In Stock Price, AMSC Rides AI Market Tailwinds

American Superconductor's Products help the Nation's Aging Powergrid work more efficiently.

When American Superconductor’s (ASMC) stock plunged 38% to $36.55 on Nov. 6, one would have thought the bottom had fallen out of the company.

It didn’t. It appears to be an overreaction, but that’s not to say nothing happened.

It seems investors decided AMSC will be a big beneficiary of the artificial intelligence (AI) frenzy that’s grabbed ahold of the stock market. Led by the Magnificent Seven technology stocks: Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Alphabet (GOOGL) – the parent of Google, Amazon (AMZN), Meta (META), and Tesla (TSLA), the market surged to all-time highs this year and pushed AMSC shares up 140% by Nov. 5.

However recently, market participants have started to question whether this rally might be a bubble and started to sell. November 6 saw a big AI sell-off and AMSC got caught in the downdraft. From its late October high, the Nasdaq Composite Index has tumbled 5.8% and the S&P 500 has fallen 3.6%. AMSC closed Wednesday down 3% to $31.18.

The ironic thing is AI is currently just a small part of American Superconductor’s business and produces a negligible amount of revenue. Currently, electric grid projects make up 83% of the business.

Not Directly Involved With AI

“We’re not involved directly with AI projects,” AMSC’s Chief Executive Donald McGann told Forbes.com, “But it doesn’t mean utilities aren’t coming to us to help fix their problems that may or may not be induced by the buildout of data centers. It’s indirect.”

Coincidentally, the same day of the AI slide, the Ayer, Mass., company reported earnings for its fiscal second quarter ended Sept. 30. It was a mixed bag. Earnings beat by five cents a share. But revenue, which hit the company’s guidance and climbed 21% to $65.9 million, fell short of Wall Street’s $67.2 million estimate. Net income was $4.8 million, or 11 cents per share, compared with $4.9 million, or 13 cents, for the same period last year. Non-GAAP net income was $8.9 million, or 20 cents per share, and beat the consensus estimate of 15 cents. Gross margins surpassed 30%.

But what might have had the biggest effect was the fiscal third-quarter guidance. The company said revenues will come in between $65 million and $70 million, but it forecast net income of more than $2 million. That’s less than half the second-quarter profit, and non-GAAP net income will exceed $6 million.

The company said non-GAAP net income gives investors a clearer view of ongoing profitability trends, underlying operating performance and cash-generating ability. It starts with net income then adds stock-based compensation and the amortization of acquisition-related intangibles.

Same Guidance for September and December Quarters

The revenue and earnings guidance for the December quarter is the same as the revenue and earnings guidance for the September quarter. So, while the previous guidance was also $2 million, the actual profit was more than double that. It’s only the company’s fifth quarter of profitability and McGann said his guidance is conservative in order to manage the market’s expectations.

As for the failing to beat second-quarter revenue estimates, McGann explains that “a semiconductor fab needed equipment sooner than we had planned,” which led the company to report revenue of $72.4 million in the June quarter. Had this payment posted in the second quarter as the company expected. It would have beat the estimate. “It was a one-time event, just one shipment. Which I thought the market understood. The business is exactly the same.”

Of course, the stock market is a forward-looking institution. Meeting an internal target is less significant than missing the widely-followed consensus estimates.

Company’s Products Manage Voltage Flows

One of AMSC’S main customer groups are engineering procurement construction companies. When they build a data center and need equipment to control the variability of the voltage flowing into the center, they call AMSC.

AMSC’s products help companies ramp up their power capacity. McGann said the company’s growth will be coming from the materials sector, which includes semiconductors, and the traditional energy sector, such as oil processing, oil extraction, oil pipelines, natural gas extraction, natural gas processing, and natural gas pipelines, All those businesses have mechanisms that need power along the way and need to connect to the power grid. AMSC regulates that power and helps them avoid power surges.

Currently, the company gets 25% of its revenue from traditional energy, 25% from renewables, such as wind, 20% from materials, which includes semiconductors, metals and mining, and 20% from utilities, services and other industrial companies.

The military sector, which makes up the remaining 10% of the revenues, is another growth area. The company is moving beyond ship protection to supply power to the ports and shipyards making and harboring ships

AMSC ended September quarter with a 12-month backlog of more than $200 million, no debt, and generated $5.1 million of free cash flow. It holds $212.9 million in cash following a sale of $124.6 million of common stock in June, which could be used for acquisitions. However, it does have a price-to-earnings multiple of 40 times next year’s earnings.

Still, Wall Street analysts are bullish on the stock. Investment bank Craig-Hallum said, “It is hard to envision a more positive market backdrop.” It added that it sees AMSC as ideally positioned to take advantage of the market tailwinds from rapidly expanding energy demand, rising electricity rates, an overwhelmed electrical grid, and the buildout of semiconductor fabs and AI/data centers. It forecast fiscal third-quarter revenues of $67.2 million and $69.1 million in the fourth quarter. It recommended investors take advantage of price weakness, giving it a price target of $66.

Oppenheimer said it expects revenue for fiscal-year 2025 to hit $274 million, and grow 8% in fiscal-year 2026 to $296 million. It forecast non-GAAP income of 80 cents a share this year and $1.02 a share next year. It raised its price target to $68.

Forbes