Monday, July 21, 2008

Even More on ZNN Stock Value: Pt 2

I'm like everyone who reads this blog in the sense that I'd like to see some expedited effort towards getting a new battery technology into my ipod, blackberry, vehicle and a million other aspects of my life especially my pocketbook.  On the one hand, we're waiting on EEStor to turn on the lights and start giving speeches. But on the other, we're to some degree waiting on each other.   That is to say, as EEStor gains further attention around the world, it necessarily gains 

additional prospective investors in ZENN which in turn acts as a gauge for EEStor's value.  This perceived value makes it easier for EEStor to capitalize itself to grow and bring the benefits of the technology to the world faster.   My personal opinion in studying this story is that Zenn Motors and EEStor have far more to gain from receiving attention of this venture whereas Kleiner Perkins CB gains more if it is kept secret.  And to be blunt, I think we win more if KPCB wins less.  

So, it's important to me as someone passionate about this topic, that we do things on this blog to hopefully accelerate the process.  To that end and in light of Massimo's Fiore's recent analysis of ZENN's stock valuation, I am happy Tom Villar has agreed to update his own work on thinking of the value of Zenn stock as a catalyst for further discussion.  So if you find EEStor fascinating, start talking with people about it--start asking for journalists to cover the story and keep the conversations going.  Email a link to a friend and get this on the radar


Back on July 2nd, 2008, b was nice enough to allow me to post an analysis on what I thought ZENN Motor Company (ZMC) would be worth which you can read here.  My very amateur analysis put the value of ZMC at US $15 billion in 2012.  Since then a lot has happened and there are even a couple of professional analyst starting to follow the company.  One in particular caught my attention, Massimo Fiore of Versant Partners as he has produced two reports, one from March 2008 and a very recent one published July 18, 2008 which you can purchase here.  Fiore's March 2008 estimate appears to have valued ZMC at roughly US $350 million for 2012 which is considerably less than my estimate of US $15 billion.  At this point I'm thinking I must be way off and this is why I am an amateur and Mr. Fiore is a professional.


But then a curious thing happened.  As mentioned above a second report was released just last week with startling different numbers assuming EEStor delivers as promised.  Although the new numbers are still below my original estimates, Fiore is now suggesting a roughly ten fold increase in his valuation.   I will not say anymore about Versant Partners report as they are a business that makes money off selling information and it wouldn't be fair for me to blab all over the web for free what took them considerable effort to produce.  If you are thinking about making a sizable investment in ZMC, you would be an idiot to rely solely on free info like this when professional information is available.


For those wanting to convert a company's valuation to a stock price, simply divide the valuation by the number of fully diluted shares.  For ZMC this is roughly 36 million shares.  To give an example using my original estimate of US $15 billion we get a stock price of:

$15,000,000,000 / 36,000,0000 shares = $416 / share.

In the real world and assuming EEStor delivers to spec, the number of shares will be diluted as ZMC issues additional shares to raise working capital.  A number like 45 to 50 million shares is probably more realistic.


Now on the surface these valuations seem ridiculous as returns of 6,000% only happen in the movies.  About the only time an average investor has been able to get returns of this size was with a company like Microsoft where stock purchased in the mid 1980s for $0.10 and sold near the peak of $58 would show a return of 5,800% before inflation.  So what is going on here?  I see a couple of possibilities:


  1. I am clueless and haven't the foggiest idea what I am talking about, a distinct possibility
  2. Professional analyst want nothing to do with EEStor as the risk of looking like an idiot if the company doesn't deliver is too high
  3. ZMC allows retail investors to get ownership in EEStor under nearly the same terms as the big Venture Capitalist (VC)  firms.


If I'm right about the last point it is truly unique and unheard of as far as I know.  As I mentioned above, returns of 6,000% don't happen, but actually they do, just not for retail investors.  Returns of this size are necessary for successful VCs to justify all the risk they take as a lot of start ups flop and don't return a dime.  ZMC's 3.8% stake in EEStor (soon to be 6.2%, see page 13 in the link) is partly what gives ZMC such upside potential.


Obviously this is an optimistic vision of what could happen if EEStor is able to deliver Energy Storage Units (EESUs) to ZMC.  Professionals such as Massimo Fiore have to be more conservative as their responsibilities are to factor in all the things that can go wrong instead of focusing on what can go right.  It is my hope the truth lies somewhere in between.


Finally since the professionals get to update their analysis, I thought I'd freshen mine up as well with some of the recent news and thoughts from the last two weeks.  Below is an update to what was published in July 2, 2008.



Although EEStor and its technology are the main focus of this blog, neither EEStor nor its main equity partnerKleiner Perkins Caufield & Byers are publicly traded.  The only equity partner publicly traded is ZENN Motor Company Inc. (ZMC) which paid USD $2.5 million in 2007 for a 3.8% stake in EEStor.  This gave EEStor a theoretical market cap of US $66 million but if EEStor is for real, a true value of the company will need to add more than a few zeros to the end.


Since ZMC is the only way for retail investors to invest in EEStor, the question becomes how much will ZMC be worth when EEStor begins delivering product?  To answer this question (or more accurately take a wild guess) I think three items need to be quantified:


  1. profit margin on EEStor's Electrical Energy Storage Unit
  2. EEStor valuation
  3. ZMC primary line of business valuation


1) EEStor's Electrical Energy Storage Unit (EESU)


Assuming EEStor's original business plan from 2002 is still relevant we come up with two specifications that differ based on production volumes:


EESU Specifications:



Prototype /

Low Volume



Energy density (Wh/L)



Specific energy (Wh/kg)



Price ($ US / kWh)




Since EEStor has been working on a production factory since 2006 the mass produced specifications should be closer to what ZENN gets in late 2008, but recent information calls this into question as it seems the first production line is more a proving line than a typical production line.  Therefore in this analysis I've decided to go with the Low Volume column and we further assume the cost figures are the EESUs production cost, not the wholesale price.


ZMC estimates a 52.2 kWh EESU will cost them C $5,200 which works out to a selling price of US $100 / kWh.  Assuming the C $5,200 price includes the buck boost converter and other misc parts, we put the profit margin for automotive sized EESUs at approximately $20 / kWh.


2) EEStor valuation


The disruptiveness of EEStor's technology is obvious in so many sectors, the task of valuing this company with any degree of accuracy is limited to providing lower limits.  Trying to forecast best case scenarios would be akin to estimating the impact of the personal computer in 1972, something only a time traveler could have done with any level of accuracy.  Therefore estimates are mostly limited to major sectors with known production volumes and where it is relatively easy to determine the cost of switching to EEStor technology.  The major sectors assumed to be significant are:

a) Transportation - Automotive

b) Military

c) Li-Ion Battery Market

2.a) Transportation - Automotive


From Dick Weir's and Carl Nelson's patent filed April 12 2001 is is pretty obvious the initial application was seen as a way to enable Electric Vehicles (EV) to replace Internal Combustion Engines (ICE) vehicles.  With gas prices hovering around US $4.00 / gallon in the United States and much higher in most of Europe the incentive to switch to an electric power source with 1/8 the cost of gasoline is undeniable assuming any additional one-time cost are reasonable.  Since an EESU + electric motor + misc parts are roughly only a few thousand dollars more than all the pieces required for an ICE, there should be no one-time cost impediment to buyers.  Thisworksheet attempts to estimate EEStor's profits over a 5 year period using the above assumptions. 


2.b) Military


Warfare will be transformed by the new types of weapons EEStor will make possible.  Railguns, lasers and other direct energy weapons will obsolete many of today's aircraft and missile systems causing massive shifts in expenditures within the coming decade.  Of course there is also the mundane existing battery systems that will also be phased out as time permits.  EEStor's unique technology allows EESUs to be built to almost any size and shape so undoubtedly the first uses will be nothing more than plug and play replacements for existing battery systems.


No serious attempt is made to qualify the types of systems that will be effected.  Instead this worksheet is a SWAG based on a percentage of total US military expenditures in the areas that could reasonable expect to benefit from EEStor's technology.  Use by militaries other than the US are not included as it is unknowable the degree to which export controls will be imposed on the technology for military purposes.


2.c) Li-Ion Market


Although Li-Ion batteries have made some in roads into the transportation automotive market, the penetration is very recent and does not account for a significant percentage of existing production although this is changing rapidly.  EEStor's technology will obsolete all Li-Ion batteries within 2 to 3 years although existing manufactures will face sudden and dramatic deterioration of their revenue as customers wait for the new UltraCap EESUs to become widely available.  This market is only about $1 billion per year although the margins will be much higher than the transportation sector.  EEStor can expect and additional $400 million / year profit from this sector by the time all Li-Ion manufactures have ceased operation. 


3) ZMC primary line of business valuation


ZMC has targeted four main areas of operations:

a) Electric Drive Train (ZENNergy Drive)

b) Highway Capable Vehicle (cityZENN)

c) Low Speed Vehicles (ZENN)

d) EV Conversion Kit

3.a) Electric Drive Train (ZENNergy Drive)


The ZENNergy Drive is ZMC primary focus and best hope for becoming a major OEM supplier to the major automotive OEMs.  ZMC has exclusive rights from EEStor as reported in ZMC's 2007 Annual Information page 10: 

FGCI has entered into an agreement with EEStor dated August 24, 2004 (with subsequent amendments dated November 26, 2004, September 30, 2005, August 8, 2006 and January 22, 2007) (collectively, the "EEStor Technology Agreement" or "Agreement" in this section) to acquire in perpetuity the worldwide exclusive rights to use EEStor's EESU in the following markets:

  • all-electric 4-wheeled personal transportation uses up to 15 kW (continuous output) drive system
  • for vehicles with a curb weight up to 1,400 kilograms, net of the battery weight,
  • for golf carts and similar-styled utility vehicles, and
  • the aftermarket conversion of any internal combustion passenger vehicle to electric drive.


The exclusivity does not include high performance sports cars with a drive system of 100 kW(continuous output) or greater.

This exclusivity granted to ZMC locks up a significant portion of the world wide vehicle market as close to 50 million of the 70 million cars produced in 2007 would fall under the 1,400 kilogram (3086 lbs) limit.  Although significant portion of these cars would be in the US market, EEStor technology will allow a return of much larger and heavier cars which have been a trademark of US automobiles for decades.  Therefore I assume ZMC will not be able to stifle adoption of EEStor technology in the North American Market as manufactures can simply side step ZMC and concentrate on EESUs in larger heavier vehicles.  Of course the world vehicle market is so large this shouldn't be an issue and the following worksheet gives profit estimates for the ZENNergy Drive for the next five years.


3.b) Highway Capable Vehicle (cityZENN)


In many ways cityZENN is an advertisement for ZMC's ZENNergy Drive as it will demonstrate how the ZENNergy can be combined with the body of a traditional passenger vehicle.  This worksheet assumes ZMC meets sales forecast for the cityZENN over the next five years.


3.c) Low Speed Vehicles (ZENN)


Although this vehicle concept is near and dear to ZMC's founder Ian Clifford, the vehicle itself is more golf cart than car and simply not suitable to the US market in large volumes.  This Kelly Blue Book review sums up the toy car feel of this vehicle.  Hopefully ZMC is planning to market this outside North America.  I am assuming no significant profit from the ZENN.


3.d) EV Conversion Kit


Although the concept of converting existing vehicles is sure to warm the hearts of treehuggers as it is always seems better to recycle something than make something new, the complexities on converting existing vehicles is daunting.  Modern vehicles have a web of interconnected devices from dashboard displays, heaters, and power brakes.  Mess with one system and all the other require changes as well.  This will limit conversions to large fleets which makes this operation difficult to manage and time consuming as each vehicle type will need it's own conversion kit.  We hope for no net profit from this operation as it could easily turn negative if mismanaged.




A final worksheet summarizes total gross profits for both EEStor and ZMC.  I'm estimating a new valuation of ZMC for 2012 of $36 billion with a stock price of $600 / share.


Of course if others see the same numbers I'm seeing, it raises the question of whether one of the majors will try to buy ZMC so they can get the exclusive rights to the EEStor's technology.  Even if EEStor releases excellent test results, it will take time for any of the majors to figure out what the technology is really worth.  But once ZMC can successfully start selling cityZENNs and ZENNergy drive trains, then I expect a bidding war to develop for ZMC.  What ZMC is worth at that point is any one's guess and of course whether Ian wants to sell will have some impact on this but at least some the majors are going to see the potential of getting a lock on a huge percentage of global production for at least the next 5 to 10 years.


Now if anyone is thinking they should immediately invest their life's savings in ZMC (ticker symbols ZNN.V andZNNMF.PK) because of the analysis they've just read, then click this link for some very important information you absolutely need to know before making your stock purchase.  If you didn't click the link then keep reading.


As a total outsider to everything you've seen discussed here is at best back of the napkin estimates and at worst a misleading stinking pile of poo.  Personally I have invested in ZMC up to my limit for speculative stocks and will not be increasing my holdings for the foreseeable future.




When ZENN made the deal with EEStor it was 2004 and gas was selling for around USD $1.80 a gallon.  At that price using EESUs for EVs is very very marginal and conversion kits make no sense at all.  If prices fall anywhere under $3.00 then things aren't nearly as rosy and anything under USD $2.00 and ZENN is kaput.  This dynamic could also explain why EEStor was willing to give ZENN such a great deal as at that time the compact EV market must not have looked very promising to EEStor.


Another caution is the price of electricity.  Unlike gas and diesel, electricity isn't fungible.  There are areas in the US where the price of electricity can be as much as 50% over the national average such as in the North East.  Of course there are also areas that can be 50% below the average such as in parts of the Mid West and Great Plains states.  If EVs prove to be a viable solution for ground freight, it will be interesting to see if there is an increase in migration of manufacturing businesses and jobs to states with low power cost.


Final tea leaf reading to consider:


ZMC is obligated to make a USD $700,000 payment to EEStor on third-party confirmation of permittivity testing of production units and another USD $500,000 upon delivery by EEStor of a production quality EESU.  Successful permittivity testing also triggers an equity funding round where existing equity partners can purchase additional shares in EEStor.  ZMC can increase its ownership to 6.2% of EEStor for USD $2 million. On May 30th ZENN received gross proceeds of CDN $15,225,000 after issuing and selling 4,060,000 shares.