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XPON: Get The Lead Out!

By Brian Lantier, CFA



We are initiating coverage of Expion360 (NASDAQ:XPON) with a valuation of $4.25 per share. Expion360’s e360 line of lithium iron phosphate deep cycle batteries have gained a foothold in the recreational vehicle (RV) market in part due to the company’s distribution partnership with Camping World (NYSE:CWH), the largest RV retailer in the United States, and we anticipate the company will leverage this initial success to establish itself in new markets.

Lithium Iron Phosphate batteries (also referred to as LiFePO4 or LFP batteries) are one of the latest innovations in the energy storage market. LFP batteries are particularly well-suited for the RV sector when compared to existing lead acid battery options (either flooded wet cell or absorbed glass mat) because of the long lifespan of LiFePO4 batteries, the greater depth of discharge of LFP batteries which means the amount of power available is nearly doubled, and the fact that LFP batteries weigh roughly half that of comparable lead acid batteries. While the technology behind Expion360’s LiFePO4 batteries is not necessarily proprietary, the company has designed their batteries with a particularly small footprint and additional safety features that has made them popular with RV users and off-road enthusiasts.

Demand for LFP batteries has been driven in part by greater market understanding of the technological advantages of LFP batteries versus traditional lead acid batteries coupled with unprecedented growth in RV demand in the US over the past few years. Several demographic trends have converged to push RV demand to record levels – principally an increased number of active retirees and the popularity among young people to seek out their own adventures off the beaten path. These trends were pushed into overdrive with the advent of the COVID pandemic when a whole new segment of the market – second home buyers, remote workers and people relocating to areas with greater opportunities to explore nature – emerged. These new buyers helped push RV sales to record levels in the US in 2021.

While the RV market has been instrumental in helping Expion360 establish its business, we believe that much of the existing deep cycle lead acid battery market can be targeted by companies assembling LiFePO4 batteries. Additional applications for deep cycle LFP batteries include:

o marine (trolling motors and energy storage to support onboard living)

o small vehicles (golf carts)

o industrial (forklifts/pallet jacks/lift gates)

o residential energy storage

We view the lead acid battery market as sharing some characteristics with the incandescent light bulb market roughly 20 years ago. Incandescent bulbs were cheap but not nearly as efficient as the compact fluorescent (CFL) bulbs that had recently come onto the market. CFLs, however, came with their own issues around disposal and risks related to breakage, so incandescent bulbs remained a popular option with consumers. However, the introduction of affordable LED lights in the last decade has allowed LED bulbs to go from having less than a 5% market share to over a 60% market share as consumers came to appreciate the reliability and cost savings associated with LEDs. We believe that LFP batteries are in a similar position today, poised to replace deep cycle lead acid batteries in many applications. Consumers who are using LFP batteries rave about their reliability, the ability to monitor discharge rates and their weight relative to lead acid batteries. We believe that the transition in the marketplace from lead acid to LFP batteries will create ample growth opportunities for Expion360 and their peers.

Key reasons to own Expion360 shares:

➢ There is a large and growing demand for modern energy storage solutions like those offered by Expion360. In the deep cycle storage market existing lead acid technology should lose market share over time to advanced batteries.

➢ Expion360 has a strong distribution relationship with Camping World, the largest RV retailer in the US.

➢ Expansion opportunities exist into new markets

o Marine – long-term storage and propulsion.

o Industrial – Forklifts, pallet jacks and truck lift gates.

o Residential – both off-grid and back-up systems

o Small vehicles – Golf carts or similar small vehicles.

o Special purpose vehicles – overland trailers

➢ Expion360 is one of the few pure plays in the energy storage market that investors can own.

In this report we provide a review of the LiFePO4 battery market and the opportunity that exists for Expion360 to gain share from the existing lead acid storage market. We follow with an in-depth description of the market, the company’s products and additional opportunities to expand their product lines. The report reviews the principal competitors in the LiFePO4 market and discusses key management figures. Our closing sections offer a summary of the most recent financial performance and we wrap up the report with our valuation. We discuss our assumptions for revenue and margins. Based on these assumptions and comparable valuations we have established a valuation of $4.25 per share.

➢ Expion360 Inc. (NASDAQ:XPON) is an emerging energy storage company based in Redmond, Oregon with a market capitalization of roughly $13 million.

➢ The company has quickly established itself in the market for Lithium Iron Phosphate (LiFePo4) batteries through its distribution agreement with the leading RV retailer in the US.

➢ The company’s growth will be driven by expansion into new markets where lead acid batteries can be replaced with LiFePo4 batteries which offer significantly longer useful lives and lower total cost of ownership. We see significant growth opportunities in the residential market, small vehicles, marine applications and industrial equipment uses.

➢ The company’s products are largely competing with existing lead acid battery technology, which is more difficult to maintain, has a shorter useful life, is significantly heavier and cannot be discharged to the same degree as LiFePo4 batteries. The sole advantage of lead acid batteries seems to be upfront costs but that advantage may decline over time.

➢ Educating the market on the advantages of LiFePo4 batteries will be a challenge and overcoming the sticker shock associated with the upfront cost of the batteries remains a hurdle. We believe the company will continue to target OEMs and distribution partners to increase market penetration.

➢ The company is led by an experienced management team with years of expertise selling into the recreational vehicle market which has given them a good understanding of consumer and OEM needs.

➢ As of 9/30/22, the company had $8.1 million in cash and another $5.0 million in inventory which offers investors a measure of protection as the company works toward becoming cash flow positive.

➢ There remains some uncertainty surrounding the growth prospects in the company’s core RV related business in 2023 as the Covid-related sales spike in that industry wanes.

➢ The company’s investments in automating the assembly of battery packs in the US should give them the ability to respond quickly to changes in the market and demand.

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