Description

SHORT: Aspen Aerogels, Inc. (NYSE: ASPN)

Aspen Aerogels, Inc. manufactures aerogel insulation products used primarily in large-scale energy infrastructure facilities. From its 2014 IPO to 2018, ASPN’s revenues were virtually unchanged, growing at a meager 0.5% CAGR. Throughout this period, ASPN’s profitability deteriorated and its share price followed, falling from $11.00 in 2014 to a low of $1.61 in December of 2018. Faced with a bleak outlook for its core business, ASPN sought new end-use applications for its product in the EV market despite having had no previous battery electric vehicle expertise.  Speculators, the sell side, and even the Kochs have adopted this narrative, driving the stock up to as high as $66.00 despite little improvement in fundamentals.

The core business does roughly $115-120M in annual sales with the EV business expected to contribute $6-7M in 2021, or 5% of overall sales.  Despite this miniscule size, management predicts battery EV related sales will grow exponentially, so much so that total consolidated revenues are expected to double every 24 months through the next decade.  In other words, ASPN’s total revenues are projected to increase from $125M in 2021 to $250M in 2023, $500m in 2025, $1B in 2027, and $2B in 2029, driven by a battery EV product that has done a mere $6-7M in lifetime sales. We believe these targets are impossibly optimistic with unrealistic unit economics that imply ASPN penetrates one out of every two EVs sold by its OEM customers globally by 2025, and roughly all EVs sold by its customers by 2030.  Shares are at best worth $10.00 per share, representing 64% downside.

EV Thermal Barrier Opportunity

ASPN first mentioned battery materials in 2019 but it wasn’t until 2020 that it unveiled PyroThin, a thermal barrier product designed to provide a solution to thermal runaway challenges within battery EVs; i.e., a fire protection product for EV batteries which may catch on fire.  By Q4 2020, ASPN announced its first U.S. Automotive OEM win (the customer has not been revealed) on its next generation EV platform.  Management said this single OEM customer relationship had the revenue potential of over $1B over the next decade. By Q4 2021, ASPN revealed its second contract win with a large Asian OEM, increasing its battery EV revenue potential to $1.3B over the next decade.  These two “contracts,” along with other opportunities in the development funnel, will allegedly double ASPN’s total revenues every 24 months through the next decade.  2021 revenue guidance is for $122-128M in total revenues, of which $6-7M is from the battery EV business with the majority $115-120M in the core legacy energy infrastructure business. 

Per management’s forecasts, this small EV Thermal Barrier revenue stream will increase by more than 10x in 2022 then grow 5x by 2025.  This revenue forecast lacks credibility.  We believe this not only because ASPN has limited experience selling into the auto market—let alone the battery EV market—but because the unit economics simply don’t add up:

PyroThin’s alleged CPV (content per vehicle) ranges from $100-300, with management referencing a generous $275 in its investor presentation materials. Let’s compare this with ASPN’s existing gel products. From 2008-2020, ASPN sold $1.1B of gel products covering 382M sq. ft. of insulation, which comes out to $2.88 per sq. ft.  $275 in CPV at $2.88 per sq. ft. equates to 95 sq. ft. of gel, which seems like a lot of insulation for a single EV battery.   For reference, a Tesla Model 3 battery pack is roughly 85x58x4 inches (LxWxH) and would hypothetically require 85 sq ft. to cover all sides, yet ASPN’s PyroThin literature states that the material “can be implemented below or above the pack top plate” as in a single side.

Moreover, let’s put $275 in context with other Tier 1s.  Borg Warner, which anticipates spending $725M in R&D in 2021 compared to ASPN’s $10M, is expecting roughly $190 in BEV CPV.

Assuming ASPN can somehow generate $360M in EV Thermal Barrier sales in 2025 at a CPV of $275, that implies placement on 1.3M vehicles with two customers.  Let’s further assume ASPN’s unnamed US OEM customer is GM and its unnamed Asian customer is Toyota.  GM has a goal of selling 1M EV units by 2025.  Toyota, which is forecasted to sell 15,000 BEV units in FY 2022, has a goal of reaching 3.5M by 2030 (of which 1.0M is for Lexus).  At these forecasted rates, GM and Toyota hope to sell ~2.75M BEVs in 2025. In this scenario, ASPN would be supplying one out of every two BEVs produced by these OEMs, which is improbable given the auto industry’s historical reliance on numerous suppliers.  Moreover, the battery material space is a fragmented industry, with competition from the likes of much larger companies including 3M, BASF, Saint-Gobain, among others.

Lastly, these alleged “contracts” by no means guarantee ASPN a single dollar of revenue:

In fact, all of this is reminiscent ASPN’s “strategic partnership” with BASF when the company attempted to penetrate the building materials end market.  The partnership began in 2016 and resulted in a mere $1 million in revenue for ASPN and was ultimately terminated in November of 2021.

Koch Investment

On June 29, 2021, ASPN received a $75M equity investment (3.46M new shares at $21.66 per share) from Koch Strategic Platforms (KSP), a subsidiary of Koch Investments Group which invests in growth equity investments.  Looking at the Koch’s investment as “smart money,” markets viewed the private placement favorably, causing the shares to rally +44% in two days.  The investment was made by KSP President David Park who spent 20 years in non-investment related roles for Koch Industries, most recently spending 15 years in business development at Georgia-Pacific. Moreover, an objective evaluation of KSP’s investments illustrate that they have been anything but smart.  KSP’s investment in ASPN was a small part of a broader $1.7B investment in “energy transformation technologies” in 2021 alone.  Here are some recent highlights below:

The biggest irony here is that the Kochs, which have perennially ranked among America’s top climate villains, and ASPN, whose business model had been reliant on legacy energy infrastructure, are somehow now viewed as champions of environmental stewardship and leaders in sustainability.

Valuation

The cheerleaders on the sell-side, many of whom have investment banking business with ASPN, all rate the company a Buy (9 Buys).  These “analysts” are simply taking management’s assumptions and slapping on overvalued sales multiples to come up with their price targets, which currently average $64.11 per share, or roughly ASPN’s peak share price during the height of last year’s EV bubble. The majority of the analysts covering ASPN initiated coverage following the promulgation of its EV narrative and most cover green energy companies with a limited knowledge of the legacy energy business or even the automotive industry.

We think ASPN is worth at best $10 per share. This valuation assumes the following: ASPN is able to double its revenue to $250M, earn a 10% EBITDA margin which is comparable to most auto suppliers, and trade at a 10x EV/EBITDA multiple. Even in this still optimistic scenario this implies 60% downside from today’s price.

But let’s say we’re completely wrong and assume ASPN can actually achieve $500M in revenues by 2025.  And let’s further assume ASPN can generate a 10% EBITDA margin (ASPN has generated negative EBITDA in each of the last five years and its peak margin in 2015 was 7%) resulting in $50M in EBITDA (the best ASPN has ever done was $9M).  At today’s valuation, ASPN trades at 16x 2025 EBITDA under management’s best-case-scenario. We struggle to find any industrial materials business or auto supplier which trades at such a lofty multiple off of imaginative earnings years out.

In conclusion, ASPN is a ridiculously overvalued and hyped story stock that has been aggressively bid up by a market that fell in love with all things BEV and ESG.  That bubble has begun to deflate and ASPN’s shares have come in as well.  However, with fundamentals, valuation, and now momentum in our favor, we see significant downside still ahead.

Sources:

https://cleantechnica.com/2020/02/19/catl-built-tesla-model-3-battery-pack-will-use-prismatic-cells/#:~:text=Here%20are%20the%20approximate%20external,long%20for%20the%20longer%20modules.

https://www.aerogel.com/industries/battery-thermal-barriers/

https://news.kochind.com/en-us/news/2021/powering-up-energy-transformation

https://www.bloomberg.com/news/articles/2021-02-10/koch-eyeing-3-billion-in-growth-equity-bets-backs-evbox-group

Catalyst

Weak guidance driven by inability to meet lofty EV Thermal Barrier revenue targets