The market sleeps on AMMO stock and its explosive growth (NASDAQ:POWW)


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If you’ve followed the growth story of AMMO Inc. (POWW) over the past few years, you know that the company’s overall advancements and investment record are quite fascinating.

Before the stock began trading on the Nasdaq in December 2020, AMMO shares traded over-the-counter. Even before it was listed on the Nasdaq, I remember AMMO garnering a lot of investor interest in various investor forums despite its small size (its market cap fluctuated between $50-100 million) due to the exponential growth that the company continued to supply.

I didn’t buy into the bullish thesis in 2019-20 because the stock’s investment case had multiple risks. My first concern was the company’s ESG score, which is below 20. I mean, they literally sell gun ammunition. Along the same lines, there are ethical concerns when it comes to investing in AMMO, which is a subjective point to some degree, but which can still affect investors’ interest/valuation multiples.

My other concerns included the lack of a longer trading history, its then-thin gross margins and hard-to-predict net income outlook, and the overall risks of a non-prime listing.

Fast forward to today, AMMO has solved nearly all of these issues as the company continues to grow exponentially. This time with a clear growth plan, significantly higher margins, (more) diversified revenue, order book and Nasdaq listing.

I’ve been watching the company’s developments for over a year now, and although I was eager to invest, due to the stock doubling following its IPO from around $5 to $10, I don’t again didn’t press the buy button. However, following AMMO’s steep decline since last summer, it seems to me that the stock’s risk/reward ratio is too attractive to ignore at this point.

The growth story

As you can see in the chart below, AMMO’s revenue snowballed, with the company’s quarterly revenue growth in the triple digits.

Ammo Chart

Koyfin.com

The company taps into the premium firearms ammunition market, producing top quality ammunition, and the commercial and military/law enforcement demand it experiences is quite lavish.

As I mentioned, AMMO’s margins were terrible a few years ago. However, with the expansion of the company’s production capacity (currently over 750 million cartridges per year) and the acquisition of gunbroker.com, margins have improved significantly. Gross and net margins stood at 46.07% and 24.74% respectively in its latest results.

Ammo margins

koyfin.com

AMMO’s margins should continue to improve thanks to two catalysts:

1) Production development: As AMMO management mentioned (and again in an interview last week), the company is experiencing such demand that its current production capacity cannot meet it. To accomplish this, AMMO is currently developing a state-of-the-art, $24 million+ brass ammunition and case manufacturing plant in Manitowoc, WI, which is expected to be commissioned this summer. The new plant is expected to triple AMMO’s current manufacturing output. Yes, tripled! Not only does this imply great potential for revenue growth (assuming there is sufficient demand to absorb the increased capacity), but it should also lead to increased margins. Management estimates that the new plant will achieve up to $1 million in operational efficiencies and cost savings.

2) Gunbroker.com boosts margin mix: The other catalyst is gunbroker.com’s higher margin revenue growth as a higher percentage of total sales over time, which is driving AMMO’s total margin mix.

Gunbroker.com is the leading online marketplace for the legal sale of firearms, ammunition and accessories with over 6 million registered users, adding 50,000 new users per month. This is a great opportunity. The platform is the biggest player in the space, which is a big gap, although vertically integrated with AMMO’s core operations, it presents multiple potential avenues for scaling.

The platform exhibits an excellent performance trajectory in all relevant metrics, as illustrated in the graphs below:

gunbroker.com metrics

Investor Presentation

In the previous quarter, revenue from the platform’s marketplace accounted for 28% of AMMO’s total revenue and 63% of operating profit. Indeed, gunbroker.com has much juicier margins, as you can see from the company’s latest 10Q. The market has EBITDA margins of around 73% ($9M + $3.2M)/$16.7M. It’s pretty amazing, and the margins will likely increase over time, as it’s a low-capital business.

sales metrics

10Q-SEC

It seems to me that if AMMO’s sales stabilize more or less as a result of the new production coming out of the new factory, sustainable long-term growth will likely be generated by the market.

In the first five months of operations since AMMO purchased GunBroker.com, auction revenue grew approximately 20% year-over-year, including mid-single digit growth in average revenue per item sold and higher single-digit growth in total items sold. The marketplace also saw an 83% increase in loyalty program revenue. With the market receiving high fees on each auction (6% of the first $250 on the sale price – 3.5% on the amount above the first $250), revenue should continue to grow, while AMMO receives streams frictionless cash flow. As shown in previous charts, gunbroker.com’s market share of gun sales is growing rapidly, and with the likelihood that an increasing number of total gun sales will migrate online, gross volumes of goods on the platform probably have an excellent growth track.

Why Stock Is Too Cheap To Ignore

Following the stock’s continued correction since last summer, it looks like equities have finally become too cheap to ignore, even though there are risks in AMMO’s business model (ESG/political/regulatory risks related firearms and, to a greater extent, ammunition sales).

The company recently reiterated its $250 million revenue forecast for the 2022 fiscal year ending March 31. At its current market capitalization, this implies a P/S slightly below 2.0. Assuming the company can maintain net margins even just above 15%, this would imply a P/E of around 13-14, suggesting the stock price is attractive.

However, here comes the weird part. Analysts predict revenue growth of just 19% next year, which makes little sense.

Revenue estimates

Looking for Alpha

We know that AMMO is struggling to meet underlying demand, increasing its revenue in line with its production capacity. Given that the company reported revenue of $42 million and $57 million in the first and second quarters, in order to reach $250 million by the end of its fiscal year 2022, it will need to report revenue of $151 million. million in the third and fourth quarters. Based on its current growth trajectory, this could be around $68 million in Q3 and $83 million in Q4. Therefore, the stock will soon be trading at a P/S of around 1.50, assuming an annual revenue rate of $332 million. In any case, the revenue estimate of $297 million for fiscal year 2023 looks incredibly low and implies a sequential decline in revenue in the middle of fiscal year 2023 for it to materialize based on the forecast of the management (i.e. quarterly revenue below $80-85 million next year).

That’s getting harder to believe given that the new factory, which is expected to triple production, is expected to boost revenue significantly. Moreover, by the way, the development of the plant is financed by the company’s cash, the balance sheet carrying almost no long-term debt. Therefore, new production should accrue additional equity value fairly quickly.

Another reason to dismiss the validity of analysts’ estimates, in this case, is the constant and fierce revisions that always lag AMMO’s real growth momentum. As you can see, projected revenue for the next quarter alone has been adjusted by 36.2% over the past six months.

Earnings revisions

Looking for Alpha

Conclusion

Overall, I find AMMO’s growth very attractive. I’ve followed the company for a while and the management execution has been phenomenal. They deliver results on time and grow the business vertically while making it look easy. The acquisition of gunbroker.com was smart and will diversify revenue over the long term. With solid revenue growth and margin expansion catalysts ahead, I think stocks are too cheap to ignore at their current levels.

Assuming conservative earnings of $320 million next year and a more reasonable P/S towards 3, a price target of around $10/share seems quite appropriate, in my opinion. Therefore, I am bullish on the stock.

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