Undoubtedly, the EV sector is here to stay. Frankly, its staggering growth is likely the precursor to much more to come. With that comes investment opportunities. And a significant one is in play for those looking beyond the surging demand in the general vehicle space. In other words, finding companies working to NOT directly compete with Tesla (NASDAQ: TSLA), Ford (NYSE: F), General Motors (NYSE: GM), and a growing number of smaller manufacturers, could be the right way to allocate investment dollars. Focused on developing and selling its lithium-ion energy sources to significant markets outside of those behemoth’s interests, Dragonfly Energy (NASDAQ: DFLI) makes that list.
And they are not newcomers trying to find footing. They already have it. Dragonfly is over a decade old, initially founded as a developer of intellectual property focused on Lithium-ion cell manufacturing. They’ve grown considerably since, revolutionizing the industry by making lithium-ion batteries more accessible for RVers while facilitating an entirely off-grid experience for RV consumers. That differentiation continues to pay growth dividends, with DFLI consistently increasing its market share and sales within the RV, marine, and off-grid solar sectors. Sales in 2022 reached $86 million. More than a sizable total for a smallcap, it represented its fifth consecutive year of revenue growth, an impressive stat since DFLI only started shipping products in 2017.
That streak is expected to continue; DFLI even guided that way. And as a more comprehensive lithium-ion battery technology company today than ever, growth is likely well beyond the forecast period. Considering that operations expanded to developing cell manufacturing processes, designing and assembling battery packs, integrating these packs and other innovative ancillary components into complete energy storage systems, and marketing and sales of these systems into diverse consumer and industrial market channels, it’s more than likely; it’s probable.
Better Energy Sources Disrupt Traditional Markets
Disruptive technology tends to have that effect, and Dragonfly has it, changing the traditional approach of powering RV, marine, and off-grid markets that have relied on lead-acid batteries. Remember, lead is toxic and remains a significant problem for the environment. As a result, demonstrated by its revenue growth, the target markets have been quite receptive to Dragonfly’s technology. They should be. It supports a global effort and mission to convert to green, renewable energy. Moreover, unlike competing lead-acid alternatives, Dragonfly and Battle Born batteries are environmentally safer, provide 2-3 times more power, last over ten times longer, are one-fifth the weight, charge faster and require no maintenance. That’s game-changing.
To get them into customers’ hands, DFLI sells its deep-cycle lithium-ion batteries under two brands. The first is its Dragonfly Energy brand, which serves its Original Equipment Manufacturing (OEM) customers and partners, including the industry-leading THOR family of recreational vehicles. The second is its direct-to-consumer retail brand, ‘Battle Born Batteries,’ named after the battle-born state of Nevada, where Dragonfly is headquartered. Beyond the revenue contributions from its branded batteries, income is generated from being designers and resellers of accessories, a defining factor making DFLI a total system integrator for its customers, a value strengthened after acquiring Wakespeed Offshore in 2022.
That deal facilitated Dragonfly to better integrate its storage systems with vehicle engines and alternators. Combined with battery pack monitoring and communication innovations, it sets the 2023 stage for DFLI to capitalize on opportunities presented by larger stationary storage applications. They’ve earned that position.
Today, Dragonfly is recognized as an expert in lithium-ion batteries and entire lithium battery storage systems. That results from having a robust patent portfolio continually strengthened by innovation, including Dragonfly’s dry powder coating cell manufacturing technology and non-flammable battery technology. Production of the cell pilot line for that technology is in progress, with plans to monetize cell manufacturing in the United States next year.
An Expected Steepening Revenue Curve In 2023
Sales from that technology will add to already appreciable revenue streams. Most recently, DFLI announced posting net sales of $20.2 million in Q4 2022. A change in product mix sales kept that revenue in check compared to last year’s period. However, the 15% increase to same period battery unit sales is expected to become more accretive in the coming quarters as DFLI adjusts to the mix shift toward OEMs, which accounted for 45% of revenue in the period, compared to just 15% of revenue in the fourth quarter of 2021. The growth in DFLI’s OEM business is primarily the result of increased demand from its partners to include its battery solutions on their products at the manufacturer rather than having the consumer choose to add them in the after-market.
That trend may continue. But by managing tighter margins, OEM sales can be a significant and profitable growth driver this year. So can it’s Direct to Consumer business, which despite macro pressures, including rising interest rates and inflation, is expected to contribute more this year as markets stabilize to a new normal. Keep in mind that DFLI’s target markets saw unprecedented growth during the pandemic years, so keeping pace with historical demand, now settled, is a tough comparable to measure against.
Still, adjustments should allow revenues to fall faster to the bottom line. From a channel perspective, Dragonfly’s OEM segment grew by more than 300% year over year, representing approximately 39% of total sales, compared to roughly 11% of sales in 2021. As noted, OEM growth was primarily the result of increased adoption of its products by new and existing customers, several of whom have begun to “design in” DFLI batteries in various RV models as original equipment. Others have increased purchases in response to end-customer demand for safer, more efficient batteries and as a replacement for traditional lead acid batteries.
Stage Set For 2H/2023 Growth
All told, revenue contributions from its segments are expected to deliver significant YoY growth. The guidance calls for Q1/2023 revenue to range between $17.0 – $19.0 million. Lower overhead is expected to increase margins, though not appreciably. However, revenues and margin curves are expected to steepen as the year goes on, benefiting from the market strength inherent to its OEM business. That’s led to DFLI, despite challenging but moderating headwinds, to forecast net sales between $112 to $122 million, or 36% year-over-year growth at the mid-point of the range.
Most important, and the reason for investors to pay attention to the DFLI value proposition at current levels, is that DFLI expects to return to being net income positive in the second half of the year. Thus, recent share price weakness exposes a disconnect between value and expectations. Knowing that savvy traders invest with a forward-looking perspective, it’s a window that could close sooner than later. And by ending last year with $17.8 million in cash and access to a $150 million equity line of credit, providing reasons that justify closing that gap may very well be in the news queue. Trading ahead of that likelihood may therefore be a wise and timely consideration.
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