Published April 12, 2023
Dragonfly Energy (NASDAQ: DFLI) stock is a misunderstood company whose current valuation exposes an asset to share price disconnect worth seizing. In fact, DFLI shares have been trading lower despite the company being better positioned than ever to capitalize on massive revenue-generating opportunities in play by DFLI targeting a niche sector opportunity: making lithium-ion batteries more accessible to recreational vehicle owners, especially those wanting off-grid experiences.
More importantly than making these power sources available, DFLI is making them better and challenging the traditional approach of powering RV, marine, and off-grid markets that have relied on lead-acid batteries. It’s a timely approach. Lead is toxic and remains a significant environmental problem, a compelling reason target market clients have been receptive to Dragonfly’s technology. And they should be; DFLI innovations support a global effort and mission to convert to green, renewable energy.
DFLI product differences are advantages. Unlike competing lead-acid alternatives, Dragonfly and its branded 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, and as important from a company and investor perspective, they are selling.
Marketing Best In Class, Lead-Acid-Free Power Sources
Marketing through two brands, Dragonfly and Battle Born, DFLI is accelerating its pace of making its deep-cycle lithium-ion batteries mainstream to specific EV and off-grid users. The Dragonfly Energy brand 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. Still, batteries are just one revenue driver contributing to the value proposition.
Additional income is generated from being designers and resellers of accessories, effectively making DFLI a total system integrator for its customers. That scope was enhanced after acquiring Wakespeed Offshore in 2022, which 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 appreciable growth, with DFLI capitalizing on and maximizing revenue-generating opportunities presented by larger stationary storage applications. It’s made DFLI a more prominent provider faster than many may have expected.
Today, Dragonfly is recognized as an expert in lithium-ion batteries and entire lithium battery storage systems. That’s earned value 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.
Multiple Lucrative Market Opportunities
The best news is that its diversified interests are accretive to a common theme: exploiting its leadership position in underserved EV, recreational vehicle, and off-grid markets. That focus does more than put lucrative markets into play; it separates them from the growing pack of EV car companies like Tesla (NASDAQ: TSLA), Ford (NYSE: F), and General Motors (NYSE: GM), where competitive pressures are squeezing margins as demand for lower priced vehicles gets stronger. In other words, weakness in DFLI share prices as part of broader EV sector weakness should be viewed as less a deterrent and more as an opportunity worth seizing. Remember, sector sentiment often lowers all companies’ valuations, even if market news isn’t necessarily relevant to a particular company.
Still, overly bearish sector sentiment isn’t always a bad thing. It creates and exposes, to those paying attention, valuation disconnects that are often too attractive to ignore. At current share prices, DFLI is one of them. And not by coincidence. Dragonfly has been creating value for over a decade by developing intellectual property focused on Lithium-ion cell manufacturing. As importantly, their work has generated appreciable growth over that time, primarily a result of its energy source innovations revolutionizing an industry by making lithium-ion batteries more accessible to niche markets. That focus and the success from it shows.
In addition to increasing its market share within the RV, marine, and off-grid solar sectors, it generated over $86 million in sales last year. What’s more, 2022 revenues marked its fifth consecutive year of revenue growth, impressive since DFLI only started shipping products in 2017. There’s more good news.
The trend is expected to continue. Dragonfly has guided investors to expect more growth in 2023 by maximizing its strength inherent to being a more comprehensive lithium-ion battery technology company today than ever. While the optimism is accretive to 2023 initiatives, the better news is that it’s likely to continue well past. Given 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 selling these systems into diverse consumer and industrial market channels, that’s a more than likely proposition, it’s probable.
They are certainly off to a great start.
Revenue Growth And Adapting To New Business Mix
Dragonfly announced posting Q4 2022 net sales of $20.2 million. While in check compared to last year’s period, the company noted that 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. It accounted for 45% of revenue in the period compared to just 15% 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.
The company expects that trend to continue. And by managing tighter margins, OEM sales can be a significant growth driver this year. So can its Direct to Consumer business, which, despite macro pressures such as rising interest rates and inflation, is expected to contribute more this year as markets stabilize to a new normal. Remember, DFLI’s target markets saw unprecedented growth during the pandemic years. Hence, keeping pace with historical demand is a tough comparison to measure against.
Still, don’t under-appreciate the opportunity. By adjusting to market conditions and proactively managing tighter margins, revenues should fall faster to the bottom line. The numbers in play are significant. From a channel perspective, Dragonfly’s OEM segment grew by more than 300% YoY, representing approximately 39% of total sales, compared to roughly 11% in 2021. As noted, OEM growth resulted from increased adoption of its products by new and existing customers, several of whom have begun to “design in” DFLI batteries as original equipment in various RV models. Others have increased purchases in response to end-customer demand for safer, more efficient batteries and as a replacement for traditional lead acid batteries.
Powering The Bullish Case For DFLI
While different streams are active, the news is good. Combined revenue contributions from its segments are expected to grow significantly this year. Management forecasts Q1/2023 revenue to range between $17.0 – $19.0 million, with strengthening margins enhancing the quality of that income as the year progresses. Providing insight into the forecast, DFLI noted to expect a steepening trajectory in revenues and margin curves in the back half of the year, getting a boost from the market strength inherent to and expected from its OEM business. That’s led DFLI to guide net sales to score between $112 to $122 million, or 36% year-over-year growth at the mid-point of the range.
That’s impressive growth in the face of economic headwinds. And many think it’s conservative, especially if monetary policy eases later this year. If so, an already compelling thesis for DFLI investment is made stronger by favorable market conditions enabling DFLI to get its products into the hands of consumers and suppliers faster than expected. In other words, short-term volatility in DFLI shares may present long-term opportunities.
Not years long, either. Dragonfly shares can likely catch a bid toward the end of this quarter, ahead of DFLI’s expectation to return to being net income positive in the year’s second half. And with its thinly-traded nature, a strengthening bid can have an enormous impact. So good, in fact, that DFLI’s 52-week high, roughly 784% higher than the current, could be back in the crosshairs. A bullish target- yes. But profitability can and often does fuel that type of trajectory.
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