Equity Research Report: XPEL Inc. (XPEL: NASDAQ)

I came across XPEL Inc. when I was looking for some specific industries in the domain of consumer retail. As I was searching through, I came across this company that makes window films and paint protection films, along with having software that lets installers examine the cuts and dimensions of a vehicle. It sounds boring, and it most definitely is, but the company's margins were something I was riveted by. In a sector where companies selling aftermarket automotive parts have operating margins of around 5.5%, XPEL's is 15.5%. Not to mention that the net margin is 12.2% against the average net margin of 4.3%. The margins are exemplary, and there is no doubt about the company's growth in this sector. Even the revenue has grown at a rate of 40% in the last four years, and the demand for the products has constantly been increasing. The only aspect I was worried about, and I would like to consider the hypothesis of XPEL being a services company rather than a product one. The gross margin from their product sales is 30%, but the margin from the service revenue stands at more than 60%. The fundamental trait that separates the company is its software and installation services.

The selling of the protection films will be a pricing game soon as the process is time-consuming and expensive simultaneously. The quality plays a part, but not the most important one, and the potential users would jump onto a better film that would provide a better value for the price. The software, however, is a distinct feature XPEL provides. The software has massive potential in the aftermarket and automotive sectors. 

However, there are numerous issues with the company and its operations. The company does not have any cash, which is a massive issue. Apart from the capital expenditure that the company has been making on the fixed assets and the development of their intangible assets, another thing that is taking up all their cash is the acquisitions they have been making. XPEL has been clear on its strategy to buy out businesses and get access to its clients in that region, which is a big gamble. XPEL does not have much debt, which is something to consider. Why aren't they acquiring companies using a portion of debt and not just going all-in cash? For a company making nearly $300 million in revenues, the unlevered cash flows haven't seen a jump in the last five years. The acquisitions have been taking up most of their cash, which is how they acquire customers inorganically. They can only make enough cash to stop making such acquisitions. However, it will not be possible without spending cash in other areas, such as operating expenses and working more on research and development. Due to such reasons and probably many more, the company does not hold much value for me, and it is highly overpriced. I might be right and wrong, but until the company figures out a way to obtain customers organically, things will not be hunky-dory in the next 5-10 years. 

You can find the equity research report and the valuation spreadsheet linked below:

Equity Research Report 

Valuation Spreadsheet