ASPN - Aspen Aerogels: Margin Expansion But Still A Lot Of Uncertainties

2023-09-28 09:28:31 ET

Summary

• Aspen Aerogels has shown improvement in margins and generated its first gross profit, but uncertainties remain for investors.
• The company specializes in aerogel insulation products and has opportunities for growth in the energy infrastructure and sustainable insulation materials markets.
• ASPN has a partnership with Koch Investments Group, providing access to financial resources and industrial expertise, and has seen solid growth in orders and shipments.

The last report from Aspen Aerogels, Inc. ( ASPN ) showcased a strong improvement in the margins of the business as they managed to generate their first gross profit. This still leaves a lot of uncertainties though for investors as the risk of share dilution and increased debt levels are still concerts that could force the share price down even more than it already has.

Estimates suggest a positive bottom line in 2025, but I think that the higher amounts of debt the company has taken are going to weigh on the bottom line significantly if the Fed decides that interest rates stay at higher levels for several years. The risk/reward case here is not in favor of a buy, but rather more neutral, which is where my rating will land as well, a hold for ASPN.

Operational Overview

ASPN specializes in the design, development, manufacture, and sale of aerogel insulation products. These products find primary application in the energy infrastructure and sustainable insulation materials markets across various regions, including the United States, Asia, Canada, Europe, and Latin America. Notably, the company provides PyroThin thermal barriers, specifically designed for use in lithium-ion batteries within the electric vehicle and energy storage industries.

The synergy between ASPN's cutting-edge technology and the robust investment capabilities of a prominent, well-connected investment firm like Koch Investments Group presents an exciting prospect. Koch provides access to substantial financial resources and brings to the table extensive industrial expertise, as well as a well-established supply chain network and capabilities. This partnership opens doors to a wealth of opportunities for ASPN growth and development. The fundamental demand that the energy industry is faced with right now is giving ASPN a significant opportunity to expand. Much of the demand is from the US and with ASPN based here already they have easy access to this market already. But what I am looking at when it comes to ASPN is the growth of orders and shipments. Right now it has been very solid for the company as it has increased 36% YTD. That is fantastic progress and should yield strong revenue growth going forward for ASPN as they expand operations further with the capital they have gotten from Koch.

The company continues to have very optimistic targets for the near term. The EBITDA margin is 25% for ASPN and the top line is to generate over $550 million. This values ASPN at a p/s under 1 which I find quite appealing, but it's not a deciding factor for investing as we know. Net margin positive is also a must in my opinion.

The EV thermals barrier market is a particularly interesting one of ASPN as it poses significant growth opportunities right now. In 2030, it is to be valued at $8 billion, a 27% CAGR from today's market valuation. If this is a trend that can be continued, I think ASPN could drive strong revenue growth from this. The main market to focus on is North America, where the CAGR is 37% between those years. Right now, the Chinese market has outgrown the North American and will be valued higher as well in 2030. However, I think that as restrictions on foreign companies continue in China, it's beneficial for ASPN to focus a lot of its effort here instead.

Technicals

On the 12-month chart for the company, we can see that it is down around 32% right now. The red line represents the moving average for the company and can be a good indication of either bearish or bullish movements in the short term. The redline is now above the share price, so this will be a key resistance to watch in the coming weeks. If I were to bet on it, I would say it will be rejected and ASPN will continue the downward trend it has had back in early 2023.

Looking at the RSI right now, it seems to be approaching an overbought level. In the range of 60 - 70, I usually get quite worried about the potential short-term movement and the negative implications it has. The MACD crossed back in late August, which sent the share price upward. If it crosses again in the coming weeks, it will likely lead to ASPN having its share price decline even further, possibly reaching the low of $5.5 per share.

Assessing The Value

Given that ASPN is yet to produce a positive bottom line, I think that there is a lack of fundamentals to base an investment on here. The one metric that could support this is the p/b right now.

Here we get a decent discount to the rest of the sector. But seeing as ASPN is more focused on growing sales, that is perhaps a more worthwhile metric to look at. Unfortunately, ASPN looks quite expensive as the p/s is at 2.2 on an FWD basis, an increase from 2.05; it has been using the TTM numbers. This implies an over 100% premium to the sector and should discourage most value investors, myself including, from investing right now or adding to a position. Until we either see a significant growth rate in the top line or the net margins turn positive, ASPN will continue to be a hold in my view.

Risks

Considering that ASPN currently operates with a negative bottom line, the prospect of taking on more debt to fuel its expansion efforts looms as a real possibility. Furthermore, the company might opt to continue diluting its shares. Over the past three years, the number of outstanding shares has already doubled, and I foresee the potential for this doubling once more in the next three years. This presents a notable downside risk for investors in the company.

Last Pointers

ASPN is an exciting opportunity as they have a quite niche market opportunity that is expected to generate significant growth over the coming years. ASPN has been building up the backlogs by 36% YTD, which is very telling about the type of demand they are seeing and experiencing. However, it needs to translate into positive earnings, and until it remains otherwise, I won't be viewing ASPN as anything other than a hold.

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