XPON: Expion360 reports second-quarter revenues slightly ahead of our expectations despite the challenges facing the RV market.
NASDAQ:XPON
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Expion360 (NASDAQ:XPON) reported sequential sales growth for the third consecutive quarter in the second quarter of 2023 with sales of $1.73 million (up 14% sequentially and 1% above our forecast). Revenue growth was driven by new products, additional distribution, and broader adoption by RV manufacturers. The company has expanded its distribution partners (dealers, wholesalers, OEMs, and private label customers) to over 300 up from 231 at the end of 2022. We are encouraged by the expansion of the company's distribution network which further reduces the company's reliance on its relationship with Camping World (NYSE:CWH).
The RV and marine markets have struggled in 2023 as higher interest rates have impacted consumer demand sharply but Expion360 was still able to grow revenues sequentially which we believe is evidence that the company continues to take share from the traditional lead acid battery market.
Pricing across the lithium-ion phosphate battery market continues to soften a bit and we have noted that Expion360 offered some discounts on its direct-to-consumer batteries this summer. Pricing for many of the company's competitor products has also dipped likely due to overall weakness in the RV and marine markets. We've also noted a pretty strong push from several new LiFePO4 companies from China competing on price with some batteries showing up for roughly half the price of those sold by Expion360. We feel that most Expion360 customers value safety and reliability over one-time cost savings, but these new low-priced batteries could be impacting lead acid battery demand.
We believe these pricing pressures and product mix impacted gross margins in the quarter which fell just over 300 basis points when compared to Q1. The prices for lithium-based battery cells, which represent a significant portion of the company's cost of goods, have continued to fluctuate in 2023 but prices are lower than in 2022 so this should flow through the income statement and positively impact the company's margins for the balance of 2023. We believe that the company's ability to offer specialized complete power generation and storage systems and its industry-leading 12-year warranty provides a competitive advantage against some of the lower-priced competitors.
Expion360 ended the first quarter with $3.6 million of cash on the balance sheet or about $0.50/share while inventory has grown to roughly $5.0 million on 6/30/23. The company will likely manage these inventory levels to ensure that it has adequate cash for the balance of 2023. While we believe that the current cash balances should provide the company with sufficient funding into early 2024 in light of the preliminary shelf filing made by the company investors should be aware of the possibility of changes to the company's capital structure (likely either an equity offering, debt issuance or some combination of the two). The company could also utilize proceeds from any offering to accelerate the time to market of its home energy products which are currently slated to be available in the second half of 2024.
Long-term investors should continue to focus on the big picture at Expion360 as they lead the transition from lead acid batteries to LFP batteries, target new markets, and launch new products rather than the quarter-to-quarter fluctuations. Long-term investors can be opportunistic and build positions if the stock trades lower on any fundraising news.
VALUATION
As of 6/30/23, Expion360 had $3.6 million in cash on its balance sheet and total inventory of $5.1 million so we feel confident that the company has sufficient capital to get into 2024. The company’s balance sheet remains fairly strong but given our current projections, it is likely that the company will need additional capital in 2024 (see "Other Considerations" below).
Key valuation considerations:
1) The company has continued to meet our revenue expectations and we believe some softening of demand from the RV market is being offset by growth in other markets. The first company that can deliver a plug-and-play home energy storage solution, like what we expect Expion360 to bring to market in 2024, will be significant.
2) We continue to value the company at 3x 2024 sales (forecast to be $10.1 million) which values the company at roughly $4.50/share. We believe that this valuation could be impacted by growth in the home energy storage market which could be a positive catalyst for the shares.
3) The company’s cash balances and inventory total over $1.25 a share as of 6/30/23 and should provide additional support for investors. As the company will not be cash flow positive in the next 12 months, we are conservatively adding $0.50 to our valuation based on the current balance sheet (for a total target valuation of $5.00).
4) In 2023 Expion360’s shares have significantly outperformed its peer group and the broader stock market more than doubling to nearly $5 while the S&P 500 was up just 13% during the same period.
We do not cover Dragonfly Energy (NASDAQ:DFLI), the largest company in the LiFePO4 battery market and Dragonfly has not yet released Q2 results (a notice of late filing of the company’s 10-Q was published this week) but Dragonfly’s shares have fallen roughly 85% year-to-date despite its position as the dominant market player. Dragonfly’s sales are forecast by other analysts to be nearly 10 times the level of Expion360 in 2022 and yet its market capitalization is just 3 times larger than Expion360.
OTHER CONSIDERATIONS
Given the recent performance of the company’s stock and the fact that the company’s cash balances at the end of the third quarter of 2023 will be roughly $2 million, we believe investors should take note of the preliminary shelf registration filed with the SEC in June. While addressing the company’s cash needs and speeding the time to market for new products like their home energy storage offering would be very positive long-term developments for the company, investors should note that it would likely increase the company’s total share count and float which could negatively impact the share price in the short-term.
In late June, the company filed a preliminary prospectus for the sale of up to $50 million of common stock, preferred stock, debt, or warrants. However, it's worth noting that the filing indicated that it would not sell stock in an offering exceeding a third of the company's public float which we estimate to be about 1.6 million shares.
While the company has not discussed acquisitions in the past, we think there is an opportunity to consolidate the LFP battery market and having the financial flexibility to capitalize on this opportunity makes sense. Many of the leading companies in specific verticals (Dakota Lithium, Allied Battery, and Renogy) are privately held and could make for interesting acquisitions or merger partners.
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