Mini deep dive on Aspen Aerogels ($ASPN)
Mini deep dive on Aspen Aerogels ($ASPN)
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Powering Up the EV Market: Mini Deep Dive On Aspen Aerogels
Aspen's advanced aerogel technology has a tremendous opportunity in the EV and energy storage markets
Growth in their thermal barrier sales should lead to BIG revenues and earnings for many years to come
Aspen should be EBITDA+ this year GAAP profitable next year
Aspen is only trading at 9x 2025 EBITDA with triple digit EBITDA growth expected for the next couple years
Aspen Aerogels began popping up in my weekly stock screens last Spring. Prior to this, I was not familiar with the company but decided to dig deeper and was quickly impressed by what I found. ASPN was down -90% from the 2021 highs and it seemed like investors weren’t appreciating the potential growth when ASPN ultimately pushed into the EV market even though management had already started discussing this opportunity on the quarterly earnings calls. After sufficient research and speaking to ASPN’s IR person, I started a 1% position on June 12th at $7.50 then averaged down into the August lows to get my cost basis down. ASPN is now up 170% in the past 4.5 months but this is only the beginning; I believe there’s still a lot more upside left.
ASPN has grown to become the 12th largest position in my investment portfolio at 3.1% — I will continue adding on pullbacks.
Investment Thesis
I believe Aspen's story is only starting to unfold despite already being on the market for over 20 years. During this period, Aspen refined its aerogel technology to create one of the best insulation materials in the world.
This material was predominantly used in the energy industrial market, from refineries and petrochemical facilities to high-performance turbine systems and in demanding thermal environments in power plants.
Among Aspen's customers are the world’s largest oil producers and the owners/operators of refineries, petrochemical plants, liquefied natural gas facilities, and power generating and distribution assets, such as ExxonMobil, Reliance Industries, PTT LNG, and Royal Dutch Shell.
However, the use case for Aspen's aerogel technology has significantly expanded since 2020, when the company introduced the PyroThin product designed to serve the electric vehicle and energy storage markets.
PyroThin is a thin, lightweight, high-temperature thermal insulation and fire barrier engineered to mitigate thermal runaway propagation across multiple lithium-ion battery system architectures, such as cell-to-cell, module, and pack barrier levels.
General Motors (GM) was the first pilot customer, who pretty soon signed a long-term agreement with Aspen to supply thermal barriers for use in the battery system of its next-generation electric vehicles. GM has remained the largest customer ever since. This deal helped to unlock agreements with other OEMs, including Toyota (in 2021), Audi (in 2023), Scania (in 2023), Honda (in 2024), and Acura (in 2024). More deals are in the pipeline that we should hear about in 2024 and beyond.
At the time of posting my deep dive on Aspen Aerogels, the thermal barrier sales represented around 20% of total revenue. In Q3 2023, they already represented over 30% (37% in the first nine months of 2023). I believe the thermal barrier revenue will exceed the energy industrial revenue in the next year or two, driving meaningful revenue growth for Aspen Aerogels.
With regards to revenue growth, I expect the company to accelerate revenues in 2024 with a 40-50% revenue CAGR over the next 3-4 years while becoming EBITDA+ in 2024 and GAAP profitable in 2025 followed by many years of profit margin expansion. I believe we’re going to see ASPN win lots of sizable contracts over the next couple years. For example, the recently awarded contract with Audi most likely won’t start until 2025. We already know from the 2023 Q3 presentation that Aspen Aerogels will announce two additional OEM awards in the coming quarter, making it six confirmed OEMs.
I would speculate here that we would see more awards from the Volkswagen Group, which already has close ties with Aspen Aerogels after awarding two contracts with two of its brands, the aforementioned Audi and also Scania, one of the biggest commercial vehicle (heavy lorries, trucks, and buses) manufacturers. Among other potential additions are Volkswagen, ŠKODA, SEAT, Bentley, and Porsche. Landing Volkswagen (the group's number-one selling brand by a wide margin) would be a significant achievement and help ensure strong revenue & earnings growth to push the stock much higher.
What I specifically like about Aspen Aerogels is that with every new OEM award, the company positions itself for additional wins. And with every new win, Aspen Aerogels can move the price up slightly from an already premium level compared to other insulation materials.
In addition to auto OEM customers, the aerogel thermal barrier technology can be used by battery manufacturers. With its unique combination of attributes (like industry-leading thermal performance, limited combustibility, tunable compressibility, and scalable density), PyroThin can help mitigate thermal runaway in lithium-ion batteries that other materials don't possess.
Furthermore, Aspen Aerogels has been heavily investing in various battery materials in the past several years. The company wants to replace graphite in lithium-ion batteries with its silicon-content anode material. These materials can enhance the cells' energy density, resulting in a longer driving range for electric vehicles. If successful, this will be an additional catalyst that is not currently included in the analysts' estimates.
There is so much room for growth within the $1.6 billion global thermal barrier market (as of 2023), which is set to grow at 27% CAGR and reach almost $9 billion by the end of this decade. With its $57 million in revenue in nine months of 2023 (0.35% of today's opportunity), Aspen Aerogels is barely scratching the surface.
And don't forget that the company is still growing its primary business of energy industrial insulation, the market that will see significant investments across all regions and applications in the coming years. The demand is already outpacing Aspen's current supply, and there are no signs of slowing down.
Right now, the key to successfully unlocking this tremendous opportunity is on-time capacity expansion, achievable only by launching a new facility, which has been a bottleneck for Aspen Aerogels so far. The company keeps raising capital to fund the development of its Aerogel Plant 2, which is projected to come online in the first half of 2024. I have some doubts about the timing so I’ll be very pleased if it happens; this would boost the company's capacity to support the tremendous growth potential we’ve just talked about.
As with most small cap companies there are some risks worth talking about such as the fact that Aspen is still losing money with low gross margins (this will improve with scale) plus dilution (from capital raises), and finally the customer concentration ie General Motors. However, it’s fair to say that the long-term upside significantly outweighs these short-term headwinds and as a long-term investor, I really like the potential outsized shareholder returns with Aspen if my investment thesis plays out the way I expect.
Latest Quarter
Aspen Aerogels reported its latest quarter (Q3 2023) on November 1, beating both EPS (EPS of -$0.19 beats by $0.07) and revenue (revenue of $60.8 million beats by $7.5 million) expectations. The company's record revenue in this quarter increased 65.7% YoY.
The revenue from sales of PyroThin thermal barrier continued its incredible growth run, up more than 250% YoY and 160% QoQ, highlighting an elevated demand for this product.
Other highlights of this quarter are improved gross margins (23% compared to 17% in Q2 2023, 11% in Q1 2023, and -17% in Q3 2022, with expected further expansion in Q4 2023), enhanced Adjusted EBITDA (negative $7.3 million vs. negative $11 million in Q2 2023, negative $14 million in Q1 2023, and negative $23 million in Q3 2022), and decrease in CapEx spending (more than 50% improvement compared to Q2 2023 and Q3 2022).
The company also updated its 2023 full-year outlook, stating that it expects total revenue "to be greater than $225.0 million, as compared to the previous range of $200.0 million and $250.0 million," while Adjusted EBITDA is expected to range between negative $40 million and negative $30 million compared to the previous range of negative $55 million and negative 45 million. The analysts' current consensus is $229.41 million in revenue, which I expect the company will beat.
All eyes are now on 2024, the year of high expectations from Aspen Aerogels. The company will need to balance growth, scale, and profitability on its way to annual revenue of approximately $550 million by 2025.
Valuation
It’s a little tough to talk about valuation right now for Aspen since they’re not profitable yet and won’t be for a couple years but we can look at several other metrics and multiples. Aspen currently has an enterprise value of $1.15 billion so using the consensus estimates below we can see that Aspen is trading at:
42x 2024 EV/EBITDA and 9.6x 2025 EV/EBITDA
10.6x 2024 EV/GP and 5.8x 2024 EV/GP
If you look at these multiples compared to the relative growth rates (of course they’re just estimates for now), then Aspen’s current valuation looks very compelling. Aspen trading at 9.6x 2025 EBITDA with triple digit growth would make the stock very undervalued at these prices.
If we plug some of these estimates above into my investment model, using slightly more conservative numbers for revenues and margins plus a projected P/E multiple below a 1.0x PEG ratio then we see how much upside could be in store for shareholders over the next 3-4 years. Obviously this model is only as good as the actual numbers and right now we’re just using estimates but it shows the potential for Aspen to deliver outsized returns to investors.
Conclusion
Aspen is one of my favorite small caps right now with several big catalysts on the horizon plus the likelihood of becoming EBITDA+ this year and GAAP profitable next year will help de-risk the growth story and attract new investors who recognize the upside potential. I understand there are risks with this company so I’m not planning to make ASPN one of my largest positions anytime soon however I’m willing to add to my current position if we get a pullback to the 50d sma at $11.50
As growth investors we should be buying companies with strong fundamentals and reasonable valuations but the homework never stops. We still need to monitor these companies and make sure they are hitting our numbers and keeping our investment thesis in-tact. If Aspen continues to land Auto/OEM customers for their newer products while continuing to expand their legacy business then I think the future looks very promising for this company and the valuation looks incredibly compelling.
If Aspen can deliver strong revenue growth with margin expansion, this combination will result in huge earnings growth in which case shareholders should buckle up because it’s going to be a fun, profitable ride higher for the stock price.
Have a great week!!!
~Jonah
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Disclaimer: The stocks mentioned in this newsletter are not intended to be construed as buy recommendations and should not be interpreted as investment advice. Many of the stocks mentioned in my newsletter have smaller market capitalizations and therefore can be more volatile and should be considered more risky. I encourage everyone to do their own research and due diligence before buying any stocks mentioned in my newsletters. Please manage your portfolio and position sizes in accordance with your own risk tolerance and investment objectives.