XPON: The RV market continues down a bumpy road.
NASDAQ:XPON
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Expion360 reports third-quarter revenues slightly below expectations as the RV market remains challenging.
Expion360 (NASDAQ:XPON) reported sequential sales growth for the fourth consecutive quarter in Q3 2023 with sales of $1.89 million (up 36.7% year over year and 9.6% sequentially but below our optimistic forecast). Revenue growth was particularly impressive considering the incredibly challenging macroeconomic backdrop where sharply higher interest rates have resulted in a nearly 50% decline in RV unit shipments forecast for 2023 from the peak of 2021. As a reminder RV shipments topped over 600,000 units in 2021, before falling sharply this year with the current industry forecast being just 297,000 units for 2023, however, sales are projected to rebound roughly 22-24% in 2024.1 In light of a 50% decline in the primary end market for the company’s products, the fact that we are projecting just a slight decline versus 2022 revenues (2022 RV sales were nearly 60% higher than 2023) is a testament to the success that the company has had at establishing itself as a premium brand and its early successes entering new markets.
Sales growth continues to be driven by a more complete product lineup, broader distribution, and additional OEM partnerships. The company highlighted that its distribution partners (dealers, wholesalers, OEMs, and private label customers) now stand at over 300 which further reduces the company's reliance on its relationship with Camping World (NYSE:CWH). While the company did not provide any details, management noted that they anticipate golf cart battery sales to continue to experience “upward momentum”.
The end markets for the company’s batteries remain primarily the RV and marine markets which are struggling in today’s high interest rate environment. Lithium Ion batteries have obvious technical advantages over traditional lead acid batteries but in today’s market consumers have become increasingly price sensitive and that has made it a very difficult operating environment for all suppliers of premium batteries like Expion360. The fact that the company was still able to achieve revenue growth in this environment (albeit from a smaller base) is encouraging if the market improves in 2024.
Discounting in the lithium-ion phosphate battery market has increased in recent months and Expion360 is offering some slight discounts on its direct-to-consumer batteries for the holidays (10-20%). While buyers are price sensitive to a degree, the fact that a battery system is essential to the RV or marine activities that they power and most buyers value safety over saving a few dollars upfront we feel like Expion360 can weather the current downturn in the market.
We believe some pricing pressure and the revenue mix shift in the quarter pushed down the gross margin to 25% (down 134 basis points from Q2 and down over 400 basis points from a year ago). While we believe that the cost of the company’s inputs – principally battery cells – has likely eased since 2022, the additional sales of products like solar panels and accessories (which carry a sharply lower margin) impacted the overall gross margin.
Expion360’s management did not provide guidance for the balance of 2023 we are forecasting a continued difficult operating environment in the market for LFP batteries for the RV and marine markets. We do anticipate a rebound in 2024 currently, but this will largely be a function of the trend in interest rates and the overall health of the US economy.
Operating expenses rebounded to $2.3 million principally due to additional staffing costs and a surprising uptick in legal and professional costs. The company’s operating costs continue to run at more than 120% of revenues which we have forecast to fall back under 100% of revenues by the end of 2024. The prolonged period of weakness in the RV/marine markets and continued cash burn will likely become areas of focus for investors.
In October 2023, the company announced a partnership with Renewable Energy Products Manufacturing (REPM) to offer Expion360’s new home and commercial energy storage solutions. This program will begin as a pilot with initial installations in the first quarter of 2024. After the successful completion of the pilot program, the Expion360 system will be made available to the entire REPM pipeline.
According to REPM’s website, the company is anticipating 3,750 residential installations in the fourth quarter of 2023 and over 6MW of solar installations for the commercial market. We don’t have any estimation of pricing in this market yet but we think it’s safe to assume residential systems will cost thousands of dollars and commercial systems will be a multiple of that. Even if only a small percentage of REPM’s customers elect to use a system an energy storage system from Expion360, the impact on our revenue model could be significant.
VALUATION
As of 9/30/23, Expion360 had $2.9 million in cash on its balance sheet and total inventory of $4.26 million so we feel confident that the company has sufficient capital to get through the end of the year and into early 2024.
Key valuation considerations:
1) The company has weathered the sharp downturn in the RV market in 2023 by expanding its product offerings and partnering with new distributors. The prospect of delivering a simplified energy storage system through its partnership with REPM offers meaningful upside.
2) We continue to value the company at 3x 2025 sales (We are introducing a 2025 Revenue forecast to be $11.5 million) which values the company at roughly $5.00/share.
3) In 2023 Expion360’s shares have significantly outperformed its peer group and the broader stock market nearly doubling to nearly $4.35 while the S&P 500 was up just 15% during the same period.
We do not cover Dragonfly Energy (NASDAQ:DFLI) the largest public company in the LiFePO4 battery market, but it’s worth noting that Dragonfly missed market expectations significantly and guided revenues lower in Q4 2023 principally as a result of the weak outlook for the RV market. Dragonfly’s shares have fallen roughly 93% year-to-date despite its position as the dominant market player. While the company didn’t share a forecast for 2024 revenues, its sales are still likely to be 8-10 times those of Expion360 in 2024, and yet its market capitalization is just 30% larger than Expion360.
To recap the market backdrop, the dominant public player in the industry has seen its stock fall by over 90% while Expion360’s stock has risen by nearly 90% year to date.
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 year will be roughly $1.5 - $2.0 million, we believe investors should be prepared for a likely increase in the company’s total share count and float following an equity offering 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 or mergers 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 partners.
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1. https://rvbusiness.com/rv-shipments-expected-to-rise-above-350000-units-in-2024/
