NASDAQ:XPON
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Expion360 (NASDAQ:XPON) reported fourth-quarter results after the market close on March 28th which were largely in line with the results that management had disclosed in mid-February. Seasonal factors and continued weakness in the RV industry combined to drastically impact shipments in the fourth quarter. Revenues were down 40% from the same period a year ago and 55% sequentially from the third quarter of 2023. The company’s core market remains the recreational vehicle and marine markets which have suffered throughout 2023 from the dual impacts of higher interest rates and higher inflation which have severely curtailed consumer spending for large purchases like boats and RVs. Additionally, several RV manufacturers have noted a shift recently toward lower-cost tow-behind models and away from higher-cost motor homes. Expion360’s management indicated that they have not seen this shift having an impact on the company, but the company has positioned itself as a premium battery offering in the RV market we think this shift to more budget-friendly options could also be impacting final demand.
The RV industry has tempered expectations for a sharp snapback in demand for 2024 now calling for a 10% rebound in shipments (down from 20%+ three months ago) but given the growing evidence that interest rates may remain higher for longer in 2024 we think the critical spring selling season is at risk for missing these lowered projections.
With RV shipments down 36% in 20231 the fact that the company was able to limit the decline in year-over-year sales to 16.5% is commendable.
Our original thesis on Expion360, that the shift from lead acid batteries to lithium would be so substantial that it would present opportunities for all companies fighting for market share to grow sharply as they took share from legacy lead acid battery companies, has largely played out as expected.
However, while we expected an RV market slowdown, we did not anticipate the degree to which higher interest rates would impact the RV market in 2023 and into 2024.
A secondary factor that seems to be emerging in this market is drastic discounting from a variety of foreign lithium iron phosphate battery manufacturers and consumer’s willingness to sacrifice some high-end features in exchange for a lower overall cost. Our initial view was that Expion360 was seeking to unseat the market leader DragonFly Energy (NASDAQ:DFLI), the manufacturer of Battle Born batteries, in the LiFePO4 market but we are seeing increased evidence of ultra-low priced LiFePO4 batteries gaining popularity among cost-conscious consumers. The price of a 4-pack of 100 Ah 12v LiFePO4 batteries on many websites is roughly equal to the price of a single equivalent battery from Expion360. A common refrain on many RV, marine, and solar forums is something along the lines of “I wouldn’t consider these batteries if they were only 10-15% cheaper but at 70%+ cheaper, I have to at least weigh the pros and cons”.
Expion360’s management did not provide guidance for 2024 and we are now forecasting a difficult operating environment in the RV and marine markets as interest rates continue to influence consumer spending. We do anticipate a modest 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 continue to exceed total revenues as the company invests in the sales infrastructure to target new markets. Expion360 ended the year with $3.9 million of cash on the balance sheet and used about $5.5 million to fund operations in 2023. The company is likely to tap its equity line of credit in 2024 to fund operations which may significantly dilute existing investors.
We continue to believe there are substantial consolidation opportunities in the fragmented LiFePO4 battery market today as most of the leading competitors of Expion360 are privately held and as Expion360 is one of the few public companies in the space the company could be an attractive merger partner.
Home Energy Storage update
The company again highlighted its new products for the home energy storage market – a wall-mounted 10kW battery/inverter system and an expandable server rack-style battery cabinet. Management indicated that the company would be releasing data sheets on these products in April 2024 we look forward to seeing how these products compare with existing alternatives. The company had previously indicated that it would be taking initial orders in the first quarter of 2024 but amended that to the second quarter of 2024 while maintaining that the first deliveries would take place in the second half of 2024.
Model update
We have concerns that the RV market is going to be slow to rebound in 2024 and that the “low-cost” alternatives are gaining traction with consumers. These concerns are partially offset by the company’s entry into the LEV and the home energy storage markets which should provide some tailwinds to the back half of 2024. Our 2024 revenue forecast is now $6.1 million which is roughly in line with 2023’s results.
We are also lowering our 2025 revenue estimate to $7.6 million but we will revisit that forecast as we progress through 2024 and we believe there is upside to this forecast if the home energy storage market continues to expand.
Financial Condition
The company has addressed its financing needs with the large equity line of credit which is welcome news, but it is likely to come at a steep cost to existing investors. At the current share price, a year of funding is likely to increase the share count by nearly 30%. While we can’t forecast what the impact will be on the share price today, we think it’s safe to assume that the additional shares will lead to a lower share price all things being equal. With an average daily trading volume below 20,000 shares, absorbing any newly issued shares could be a challenge.
Key valuation considerations:
1) The sharp downturn in the RV market has been deeper and longer lasting than expected. The company has diversified its product lineup to include Light Electric Vehicles (LEVs) and home energy storage and the company’s success in these markets will be a key focus for investors in 2024.
2) We continue to value the company at 3x 2025 sales, based on our new forecast of $7.6 million for 2025 we are lowering our valuation to roughly $3.25/share. Future share issuance could impact this target valuation.
3) The company’s shares have significantly underperformed the market in 2024 (down 40%+ in the first quarter) after an extended period of outperformance. It appears that investors are recognizing the challenging operating environment for the company.
4) The new equity line of credit addresses the short-term cash flow challenges for Expion360 but it will likely significantly increase the number of outstanding shares and the number of shares freely trading. Absorbing these shares into the market could cause additional volatility for the shares of Expion360 and negatively impact the share price.
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1. https://toystoragenation.com/2024/01/30/rv-shipments-top-313k-in-2023-projected-to-rise-in-2024/
