XPEL: Interesting Economics In A Boring Industry
XPEL is a name that I’ve been analyzing and thinking about in the past few weeks. I haven't found any analysis that answered a lot of the questions I have, so I decided to do it on my own. I'm on the fence about if this company is simply too hard to evaluate, but doing this analysis will at least bring a little more clarity. To me, if you can't understand the runway of a business, you don't understand it well enough and it qualifies as a "pass."
In this quick analysis, we'll be covering:
A quick introduction to this company is first necessary. XPEL began its life as a software company, leasing out its Designed Access Program (DAP) to other companies to use its software in automotive product design. The company realized there was huge potential in the market for using the DAP on after-market automotive products, including automotive surface and paint protection, headlight protection, and automotive window films. So they shifted from being a SaaS company to selling the products above. Their Ultimate line is their flagship product, which is a film that covers whatever area of your car you want and protects against rocks, bug guts, and angry road debris.
The results have been mouth-watering to investors. Over the past 5 years, they've had over 30% compound annual revenue growth. Over the last decade, they've had 38% net income growth. They did this in a way that was value-adding to shareholders. The shares outstanding from 2012 to 2021 have gone from 25.8 to 27.6 as they only had two years of equity dilution. Most importantly, they've had a corresponding explosion in share appreciation. I know the company was trading as a penny stock somewhere in the $.05 range on the TSX venture and was uplisted to the NASDAQ in 2019. Its share price has gone all the way up to $101.4. So it's already been a massive wealth creator for those who held their shares for the whole time.
The paint protection film industry is not a fast-growing industry. Most reports I've seen estimate revenue growth at 6-7% until 2028. The report linked above also states that PPF market was highly affected by COVID-19, as 2020 saw a growth rate of 2.3% in 2020. It's also important to note that the automotive portion of PPF is around 80% of the PPF market as a whole. I question the validity of this report as it predicts an industry value of $697 million in 2028, XPEL's TTM product revenue is currently at $217 million. Meaning XPEL already has 31% of the 2028 forward market share.
Now this means they have been decimating competition, which is definitely a positive. However, I have to pause when thinking of investing in this company for a few reasons. If they are to continue their revenue growth of ~20%, they will need to have a 100% market share by 2028. I can see them gaining more, but taking 100% is not a likely outcome. This also means once they have a larger share of the market, how will they maintain 20% revenue growth in an industry growing at 6-7%?
I don’t think they can. Now, they do have a budding services segment of their business. If they increase the install base and sign up partners to install their product, you will see that number go up. It’s gone from $17 million to $42 million in only 3 years. I just am having issues seeing how this segment takes over the product segment in order to maintain that 20%+ growth number.
I was planning on doing more analysis on this company, but from what I’ve researched above, I don’t see much of a point in diving deeper and spending time on something that doesn’t have a much, much longer runway than this. If this company had other business segments that had longer runways, I could get interested, but for now, this goes in the too-hard pile and is a pass for me!
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