Is Aspen Aerogels Stock a Buy?

Aspen Aerogels (NYSE:ASPN) specializes in aerogel insulation products and while far from the exciting businesses that typically generate massive investor enthusiasm, shares of this this niche manufacturer have skyrocketed by more than 200% in the last 12 months.

What’s driving ASPN share price to climb at such a rapid rate, and can the stock continue to deliver exceptional returns going forward?

Aspen Aerogels’ Tie to the EV Market

Aspen’s main growth driver is the use of its aerogels as thermal barriers in EV batteries. The company’s proprietary technology helps to keep batteries from overheating, including managing heat during thermal runaway events.

Such an event occurs when a lithium-ion battery cell short circuits, causing a sudden rise in internal temperature. If not controlled, thermal runaway can eventually cause battery cells to ignite and cause vehicles to catch fire.

Making batteries that are resistant to these events is a key part of ensuring electric vehicle safety. Unlike ordinary vehicle fires, EV fires cannot be extinguished with ordinary jets of water. As such, firefighters often struggle to contain EV fires.

The use of new technologies like Aspen’s aerogel insulation to make batteries less susceptible to thermal runaway, therefore, is extremely important to making EVs safer and increasing consumer adoption.

Aspen has a potentially long growth runway ahead of it where EVs are concerned. The number of these vehicles on the road is expected to grow to about 33 million by the year 2030. With several auto majors such as Audi and and GM already using Aspen’s insulators in their vehicles, it’s likely that the company will continue to grow alongside this burgeoning market for electric cars.

Even the US government is banking on Aspen’s ability to spur the growth of safer electric vehicles. Recently, the Department of Transportation extended a loan of over $670 million to the company for the purpose of building a new factory for its battery insulators.

Once up and running, this factory could eventually supply thermal barriers for up to two million new EVs per year.

How Is Aspen Performing?

Given its connection to the fast-growing EV industry, it’s clear that Aspen Aerogels has a solid opportunity in front of it.

Potential investors will also be pleased to find that the company has made real progress in capitalizing on this opportunity so far. In Q2, for instance, Aspen Aerogels reported revenues of $117.8 million, up 145% over the year-ago period. The second quarter also saw Aspen become profitable for the first time with a net income of $16.8 million.

High revenue growth has been a long-term trend at Aspen Aerogels, though it has accelerated enormously in recent quarters.

Since mid-2021, the company has reported double-digit year-over-year revenue growth rates in all but one quarter. Q1 and Q2 of this year, though, saw those growth rates rise into triple-digit territory.

The recent spike in revenues has also helped Aspen rapidly improve its profitability. For the full year of 2022, the company lost about $83 million. In 2023, that number fell to $46 million. With revenues still rising and the company now profitable, it’s likely that Aspen Aerogels will continue to see strong earnings growth in the coming quarters.

A final point investors should consider with regard to Aspen’s performance is the sheer impact that thermal barrier revenue has had on total revenue growth. For Q2, thermal barrier revenue rose 540% year-over-year, showing just how dramatically demand for thermal barriers in EV batteries has acted as a tailwind for Aspen.

With the EV market only likely to continue growing, it seems probable that Aspen Aerogels will see revenue grow well into the future.

Is Aspen Aerogels Overvalued?

While Aspen Aerogels has been on a very strong run of revenue growth and achieved net profitability, the stock’s valuation still looks quite high relative to its performance.

ASPN shares trade at over 127x expected earnings, a fact that could deter value investors and even some more conservative growth investors.

The stock’s price-to-sales and price-to-book ratios are also somewhat high at 4.7 and 3.2, respectively.

Looking at Aspen’s Financial Strength

While it may not fully make up for ASPN’s high price, it’s worth noting that Aspen Aerogels seems to be in a relatively strong financial position.

The company maintains a roughly $91.4 million reserve of cash and cash equivalents, giving it a great deal of room to continue investing in new growth.

Aspen’s balance sheet also shows total assets of $748.6 million to total liabilities of just $230.8 million.

Is Aspen Aerogels Stock a Buy?

Aspen Aerogels stock is a buy with upside to $32 per share according to the consensus price target of 11 analysts.

Nonetheless, the company presents investors with an interesting mix of positives and negatives. On the one hand, it has turned in extremely impressive performance over the last few years, has reached profitability and is building out manufacturing capacity that will allow it to keep supplying more thermal barriers for the EV market.

The growth runway here seems quite long, especially considering that Aspen is already a go-to supplier of battery insulation materials for large automakers.

The downside is that shares of the company seem to have joined other EV-related stocks in racking up very high valuations. While future earnings growth could have the potential to justify ASPN’s price, it doesn’t appear that investors are landing a meaningful bargain at the current price multiples.

With that said, there seem to be more tailwinds than headwinds acting on ASPN at the moment. This view is strongly reflected in the present crop of analyst price forecasts for the stock. The median target price for Aspen Aerogels represents an upside of nearly 70% compared to the most recent price of $20.64. Furthermore, all 11 of the analysts covering the stock at the moment rate it as a buy.

Taking everything into account, Aspen Aerogels looks like a good long-term play on the growth of the EV market. With automakers investing more and more into EV production, the materials that Aspen makes are likely to play a key role in continuing to improve battery safety.

Even with a high valuation, growth investors may find ASPN quite appealing for its potential to produce much higher earnings in the future as the number of electric vehicles on the road continues to rise.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.