Description

Summary

Rather than a long-term investment, this is a trade idea (options or the equity, though with the options you'd take a hit on the bid-ask) with the expectation that XPEL will beat on earnings tomorrow morning based on my read of third-party monthly U.S. enthusiast auto sales data.  The data shows XPEL's U.S. sales are meaningfully correlated with enthusiast sales and enthusiast sales were much better in Q2 than Q1.

XPEL’s main PPF product still overwhelmingly caters to enthusiasts.  Third-party auto sales data shows that Q1 2024 had anomalously bad U.S. enthusiast auto sales (-14.4%) relative to the overall U.S. auto sales (+2.6%). Slow U.S. sales growth (+2% y/y growth vs at least +15% growth in all prior quarters) led to a big selloff, with XPEL trading down from $54/share to the $32/share today. Monthly data during Q2 2024 shows that the trend has reversed. In April and May, in particular, enthusiasts returned to the market. Unfortunately, June was soft, but the overall quarter was relatively strong for enthusiast auto sales—and much better than the awful Q1 2024 enthusiast data that appears to have triggered the big selloff.

While I have not observed what percentage of XPEL’s end-users constitute enthusiasts (surely it would depend in part on the definition of “enthusiast” as well), a recent management call suggested it was +50%. I’d guess more like 60-80%. Thus it appears that any dislocations in enthusiast sales, as shown above, can potentially have a disproportionate impact on XPEL’s U.S. sales.

During the Q1 2024 earnings call, we saw this relationship in action with CEO Ryan Pape noting the April sales uplift,

As I mentioned, seeing in April exceed March is very unusual in the typical cycle we have in the U.S. So we need to understand that, but that's sort of what we're -- the best we're looking at now in terms of our expectations, and we'll update that as we go.

XPEL management was surprised to see April revenues exceed March revenues because April auto sales almost never exceed March auto sales. Nationally, you have to go all the way back to 1993 to find the last instance where April units sold exceeded March units sold (Source: FRED non-seasonally adjusted vehicle sales data; Note that 2024 had April vehicle sales of 1.361M vs March vehicle sales of 1.476M, matching the average 92% ratio over the past 49 years). So one can appreciate how this anomaly would stick out to XPEL management. It appears that the anomaly occurred because enthusiasts—XPEL’s target market—happened to drop out of the market.

Consensus estimates have XPEL’s Q2 2024 revenues at $105.7M (S&P Cap IQ). By my arithmetic, that figure bakes in similarly sluggish Q2 2024 U.S. revenue growth (math below). If one accepts, as I do, that in XPEL’s current form—experiencing slower U.S. growth—its sales will more strongly correspond to enthusiast sales, then Q2 2024 ought to show much better than 2% U.S. revenue growth. With XPEL’s non-US business firing on all cylinders (except China, the only location where XPEL still goes through a third-party distributor, leading to absurdly lumpy revenue recognition (see table below)), a modest return of the U.S. business should lead XPEL to beat earnings.

Why the Opportunity Exists

One has to take it on faith that XPEL’s sales correlate with enthusiast sales. It would be great to run a statistical backtest on the relationship between enthusiast sales and XPEL sales. However, XPEL’s revenue growth rate in recent years has been so high that it doesn’t seem realistic to be able to tease out any meaningful relationship. I suspect the relationship will tend to hold on a go-forward basis, given the normalization of XPEL’s U.S. revenue growth.

Also, getting the data was mildly labor intensive. To get the quarterly figures, I punched in the data off of charts and then averaged the months to get the quarterly figures. Perhaps there are better sources of the info and the quants are already on it, but given XPEL’s modest market cap and the fact that a historical backtest likely won’t work—it requires making assumptions about XPEL’s business and connecting those assumptions to the data—I suspect they haven’t tapped into this.

Risks

While it’s not necessarily a good idea to look to the market for instruction, two dynamics in particular make me nervous:

• Large short interest.  A large percentage of XPEL’s float is sold short: 2.3M of 27.6M shares (8.5%). Interestingly, they have been persistent. Even as XPEL’s share price has tanked, transitioning it from a growth stock to a value stock, the shorts have pressed their position.  They are well-heeled and have conviction.
• Trading down into earnings.  If the shorts are onto something—either third-party-data or moat related—they seem to perhaps be pressing the position leading into earnings.
• Weak EV sales.  Boscarelli nailed it with his short thesis, describing how EV early adopters (especially Tesla owners) had turbocharged XPEL’s growth in recent years. The later adopters are less inclined to use PPF. This could represent a meaningful headwind to XPEL’s U.S. growth going forward—for which we haven’t yet seen the full results. In other words, the growth headwinds resulting from the EV early adopters washing out could countervail positive signs of the enthusiast look-through sales data.
• Battleground stock.  Relatedly, XPEL is now a battleground stock. Perhaps there are easier ways to make money.

Catalyst

Q2 earnings tomorrow morning