ASPN - Aspen Aerogels

[patientcapital]

Below is a long read on Aspen Aerogels. I hope you enjoy reading it as much as I enjoyed learning about this business.

 

I welcome your questions and comments.

 

Summary:

 

Aspen Aerogels is an under-followed and overlooked microcap (~$75 million market capitalization) that punches well above its weight class.

 

Aspen is by no means the typical "value" or "compounder" investment. You won't find a low P/E ratio or a current high ROIC here. This company doesn't screen well, and at first glance, it's not obvious why their innovation matters or why they should generate a significant amount of cash flow over the next few years. For these reasons, I believe the stock is mispriced today.

 

I believe an investment in Aspen offers an asymmetric return of ~200-400% over a three-year time horizon with limited downside if I’m just plain wrong.

 

Key Points:

 

1. Aspen sells a wonderful product: aerogel insulation is the best performing insulation on earth

2. Long runway to grow: insulation materials are a +$50 billion market, Aspen has <0.3% market share, and aerogels continue to gain market share each year

3. Aerogel technology is perfectly aligned with our energy future: as energy efficiency demands increase, so does the use of aerogel

4. Blue chip partners validate Aspen’s technology: Pyrogel was developed with ExxonMobil, Cyrogel was developed with Technip, and Spaceloft was developed with BASF

5. Priced Below Liquidation Value: Aspen’s shares trade today for ~1x tangible book value, a metric that doesn’t ascribe any value to their valuable intellectual property

6. Aspen’s end-markets have recently improved: the company is poised to generate meaningful cash flows over the next few years. By my math, ASPN currently trades for ~2.5x 2021E adj. EBITDA

 

One final note: ASPN is a very thinly traded stock. This idea is likely not suitable for large scale investors.

 

What Is Aerogel?:

 

As the name suggests, Aspen Aerogels manufactures a revolutionary material called aerogel.

 

Think of an aerogel like a sponge – it’s a solid material comprised of many open chambers filled with air. Unlike a sponge, however, aerogels have millions of tiny nanopores, and by weight, they are ~99% air.

 

Aerogels are the lightest solid materials on earth, and due to their extreme porosity, they are the best insulators on earth.

 

Put another way, due to their extreme porosity and open surface area, aerogels are excellent at absorbing things, from heat, to cold, to sound, to substances.

 

For a quick overview on aerogel, I recommend this short video:

 

Aspen’s Innovation:

 

Materials science is one of the hardest scientific fields for taking a lab discovery and creating a compelling business model around. For example, the standing joke about the exciting "new" material graphene is that "it can do everything, except leave the lab."

 

Although aerogels were first discovered in the 1930s by Stanford scientist Steven Kistler, they remained on the shelf for nearly 70 years.

 

Aerogels weren’t commercialized because:

1) they are fragile (crumble on touch), and

2) they are expensive to manufacture

 

Aspen came on the scene in the late 90s / early 2000s with a novel invention that solved these problems that held aerogels back for decades. Aspen invented what the insulation industry refers to now as ‘aerogel blankets.’ Aspen manufactures an aerogel like you normally would, but it's cast within a fibrous blanket.

 

This composite material produces an aerogel that's rollable, flexible, and cuttable - much like traditional insulation, all without sacrificing the wonderful insulative properties of aerogel. Aerogel blankets are easier to manufacture than blocks of aerogel because they can be rolled and batch produced on spools, instead of individual cubes or granules.

 

To use an analogy: concrete is brittle, so construction firms cast concrete in steel rebar to keep it from cracking if a structure shifts or bends. The fibrous batting in an aerogel blanket works in a similar way to absorb torsion impacts.

 

See the link below for a picture of an aerogel blanket:

 

http://filecache.mediaroom.com/mr5mr_aerogel/106494/Aspen_Aerogels-Flame-n-Finger.jpg

 

The Insulation Market:

 

Global insulation represents a $52.3 billion market, of which, Aspen has ~0.3% market share. In a world of increasing energy efficiency requirements, it’s hard to see a future where aerogel isn’t used more often.

 

Aerogel is special for a simple reason: it has the best insulative performance (known as an r value) for a material. Aerogel insulation is able to: 1) conserve more energy, 2) use 75-90% less material than other forms of insulation, 3) is easier to install, 4) offers better durability, and 5) has other unique properties like fire-resistance and hydrophobicity (which prevents corrosion under insulation (CUI), a huge problem). Aerogel blankets are used to do jobs that other forms of insulation cannot.

 

Aspen controls the market for aerogel blankets because of their intellectual property position in both the manufacturing process and product itself. To date, they have sold over $800 million of aerogel blankets and have increasingly become a trusted part of the insulation industry. Insulation is a very slow moving industry and it’s taken many years just to get specified in large projects and construction firms. Aspen is now at a point of critical acceptance.

 

How Aerogel Is Used Today:

 

The biggest downside to aerogel is that it costs significantly more than traditional insulation, and therefore it’s mainly used where other insulation materials fall short on performance. Aerogel works well in places that require high energy efficiency, have limited space, need simpler installation, or mission critical pipes that require corrosion under insulation or frost protection.

 

Aerogel found its first major niche in the energy infrastructure insulation market, which is a ~$3 billion dollar market (Aspen has ~4% market share). These infrastructure projects typically take the form of petrochemical plants and oil/gas pipelines. Within energy infrastructure, space and energy efficiency are at a premium, making aerogels quite useful. Over the past decade, Aspen's revenues almost exclusively came from this market segment, and their sales have increased by a CAGR of approximately 18%.

 

Although Aspen has a significant runway to keep growing in energy infrastructure insulation, approximately two-thirds of the $50b insulation market lies in building construction. While Aspen has a product for this space (called Spaceloft A2), they haven’t made significant in-roads yet. Aerogel’s value proposition in buildings is simple: it allows buildings to have thinner walls in tight spaces (think cities), or they can retrofit old walls with a thin insulation façade without overly changing the aesthetic. This later point is an area of focus for old buildings in Europe where regulations require these façades. Aspen's insulation is also A2 grade fire resistant which is rare for insulation and important for new safety regulations after the Grenfell Tower tragedy.

 

Aspen is entering the building construction market through a partnership it has with with BASF. It's worth mentioning that BASF is a 60 billion dollar company, yet they decided to work with Aspen, a 75 million dollar company because they are the clear leader in this space, and the opportunity is huge.

 

BASF was a venture investor in Aspen, and they agreed to provide Aspen up to $20m of product pre-payments in exchange for the exclusive distribution rights for Aspen’s Spaceloft A2 product, now marketed through BASF as “Slentex.” These pre-payments will be paid back as product discounts for spaceloft. As a leader in building insulation BASF already has distribution critical mass to make this a significant opportunity for Aspen. This source of revenue is expected to begin in earnest starting in Q1 2019. Although product discounts are less than ideal in a low margin business, the key for Aspen, a high overhead business, is filling up its production facility to absorb all the fixed costs. This is a win-win partnership that allows aspen to focus on energy infrastructure.

 

Separately, Aspen management has indicated that they are co-developing with BASF a completely new aerogel form-factor (not a blanket). Although these developments are very exciting, the Aspen investment works even if their growth in building materials is minimal. This represents an upside case, and there is potential to co-develop a second manufacturing plant with BASF or potentially be acquired by them.

 

As mentioned earlier, in addition to BASF, Aspen’s technology has been validated by other leading companies. Aspen’s hot insulation product: Pyrogel, was built alongside ExxonMobil for its petrochemical plants, while their cold insulation product: Cryogel, was developed with Technip, (the largest subsea oil & gas pipeline contractor) for deep-water pipe-in-pipe applications.

 

As of writing, the market for aerogel insulation in the energy infrastructure market has dramatically improved. The outlook for 2019-2021 has improved due to advances in LNG terminal/pipeline construction plans as well as subsea pipeline projects. These are spaces where aerogels have the highest value proposition. I discuss this further below. Aspen is well positioned to capture meaningful insulation share in this wave of new projects being commissioned over the next three years.

 

Finally, while we’ve focused on insulation, there are many other potential uses for aerogel outside of insulation. Aspen is actively looking to license out its technology in areas such as energy storage, filtration, etc. These licensing deals can provide non-dilutive, financing to the company, and unlock value within their IP.

 

Economics of Aerogel Blanket Production:

 

Aspen runs a challenging business for two reasons:

 

1) Insulation is a low gross margin product, and 2) the business has high fixed costs.

 

The combination of these two factors means that it takes a critical mass of market acceptance just for Aspen to generate enough gross profit dollars to cover their fixed costs. As a result, Aspen’s break-even point sits at ~$110m of revenue, while their current plant capacity is $180-$200m.

 

Revenues generated above this break-even point flow-through at high margins (30-40% EBITDA margins) because, again, most of their costs are fixed.

 

I call this initial long ramp-up period: Aspen’s cash-flow “black hole.” If you look at Aspen’s financial statements, they have been an incinerator of cash since its inception.

 

These difficulties that make it difficult for Aspen, fortunately serve as significant barriers-to-entry for any potential new market entrants in the future.

 

The company has cumulatively burned over $400 million of investor money to date and this came from 1) their multiple plant production lines located in their East Providence facility, which cost ~$150m to build-out, 2) they spent over $100m on R&D, and 3) they generated an additional $150m in accumulated losses to get to where they are today.

 

Aspen has finally made it to their break-even revenue point today, and they have visibility that their end-markets are improving significantly over the next two to three years. As a result, I expect Aspen to generate approximately $25m of adjusted EBITDA in 2021, compared to its current market capitalization of $75m.

 

If we look at Aspen’s cost structure, not all is as it seems. For example, half of Aspen’s cost of goods sold are actually fixed costs, not variable costs. This means that in aggregate, 60% of their total cost base is fixed. You’ll also notice that as revenues ramp up and down, the gross margins fluctuate significantly due to its fixed cost nature.

 

Aspen’s break-even point is approximately $110m of revenues, which is essentially where the company’s revenue base sits today (for 2018). Presently, management’s initial 2019 revenue guidance is that they will grow “at least 20%” in 2019, which pushes them back into positive cash flow territory.

 

The good news about this business is that while their end markets are cyclical, once a energy capex project is commissioned (such as a pipeline or a petrochemical plant), it happens, regardless of how oil prices fluctuate. These projects take years of planning and building, which provides visibility once commissioned. There's no turning back unless there's financial distress at the parent company. This means that we already have a good sense that 2019/2020 will be strong for Aspen (likely 2021 will be too), and management has indicated as much. More on that below.

 

Once Aspen crosses $110m of revenue, each revenue dollar flows through at a 30-40% EBITDA margin until they hit their manufacturing capacity limit of $180-$200m. At full-tilt capacity, they expect to generate ~$35m of operating cash flow per year, or more if they can optimize their cost structure/pricing. Maintenance capex is approximately ~$5M per year, leaving free cash flow of roughly $30m. If Aspen is able to increase prices and rationalize their cost base, then this 35m figure is conservative and is closer to $50m per year.

 

Aspen currently has a market capitalization of ~$75m, and my estimate of ~$25m of EBITDA, implies a ~3x multiple on 2021 estimates.

 

At a multiple of 10x 2021 EBITDA, the company is worth $250m, which is a 233% return vs today. At 12x EBITDA, that's a 300% return.

 

End-Market Opportunities:

 

It’s important to understand where Aspen sells its products today and what has happened historically.

 

As previously mentioned, Aspen sells its insulation products predominantly in the energy infrastructure market. Think subsea pipelines, LNG pipelines, petrochemical plants, as well as more traditional energy generation and industrial plants.

 

Although Aspen has grown at a ~18% CAGR over the past decade, their revenues have stagnated from 2015 to present. There are a few moving parts here, so it’s important to understand why this happened, because it truly is a growth company.

 

First, in 2014, oil prices declined from $115 per barrel to $30 per barrel. This caused Aspen’s end market: energy capital expenditures, to come to a grinding halt. This ripple effect first hit Aspen in late 2016. Capex spending returned to growth in 2017, and insulation is a late capex cycle purchase, so this market only first started to recover in earnest in late 2017/2018.

 

The second and less obvious point is that Aspen benefited from a huge project they did with Reliance Industries from 2013 to 2017. Reliance Industry’s Jamnagar petrochemical plant is the largest plant in the world, and Aspen was specified as part of the insulation mix of that project (another significant validation of their product). In aggregate, Aspen sold to Reliance nearly $80m of insulation over this period, and in 2016 alone, over 25% of their revenues were to Reliance for the project. Aspen's business would have looked far worse in 2016 if they didn’t have this contract proping them up. When the Reliance project ended in 2017/2018, the core business was growing well, but they were lapping this project which made their growth look poor. It’s important to recognize that Aspen didn’t have much project work at all in 2018, and now multiple sizable contracts ($10 to $20 million dollar opportunities) will hopefully materialize in 2019/2020/2021.

 

To summarize: when the energy capex cycle petered off in 2015 & 2016, the reliance project picked up steam, which made their performance look better than it was. By 2017/2018, their core markets were picking up again, but they lost Reliance, so it looked like this business was just completely stagnant. Thus stagnant growth in 2016, 2017 and 2018. We’ve finally lapped both of these headwinds by the end of 2018, and this leaves us at a revenue threshold of ~EBITDA break-even. This sets up well for the significant growth that is ahead, leading to meaningful cash flow generation.

 

On their last earnings call management indicated that they will return to growth in 2019, and will grow "at least 20%" in 2019. I honestly believe this figure will be in the high 20%s (if you just do the simple math on their guidance of projects they have in hand). Management indicated that their project pipeline is shaping up well as many large LNG and subsea projects are being commissioned now for a variety of reasons. If you aren't in the weeds on LNG, this is a tremendous growth story, and subsea is seeing a renaissance, as the break even oil price for these projects has decreased significantly.

 

Aspen had very little "project" revenue in 2018 (less than 10% of total), and it was mostly what they call "maintenance revenue" in 2018. Core maintenance revenues are growing nicely, but as these projects come online, this will lead to significant growth.

 

I believe Aspen’s revenues will grow consistently over the next few years: at a ~20% CAGR through year-end 2021, resulting in ~$180m of revenue and ~$25m of adjusted EBITDA.

 

The breakdown of this revenue growth comes from 1) continued market share gains for aerogel in place of traditional insulation, 2) recovery in upstream pipeline projects (LNG, subsea, petrochem), 3) penetration into new markets such as building materials and power plants.

 

Margin of Safety:

 

I won’t belabor the point on net-asset-value, because no one really makes money this way, but it’s worth noting that Aspen trades today at or below its liquidation value in case that unforeseen risks play out or this thesis doesn’t materialize.

 

If you look at Aspen’s balance sheet, the company has no net-debt today, they spent over $150m on its plant (heavily depreciated to ~$70m) and they have spent over $100m on R&D (which is reflected as zero value on the balance sheet). It’s clear to me that in the case of a liquidation or sale, Aspen will be sold for at least it’s current market capitalization of $75m.

 

I believe that BASF sees strategic value in this business (evidenced by the exclusive license and joint-development-agreement they entered with Aspen).

 

Recent Share Price Volatility:

 

Finally, it’s important to explain why Aspen’s shares dropped precipitously from around $4 to $5 to approximately $1.60 per share in December 2018. (We're back to ~$3 today).

 

This happened for a number of reasons:

 

First, Aspen’s third-quarter 2018 results came in slightly below expectations, and management guided to a slightly weaker fourth quarter 2018 as well. Recall that this business is fixed cost heavy, and these results caused Aspen to burn more of their cash reserves than expected. To cover this shortfall, the company tried to raise equity to bolster their balance sheet to fund their growth in 2019.

 

The stock was already trading at all-time-lows, and this potential dilution was too much to bear for some existing shareholders, who rushed for the exits when the bankers started calling. Aspen is very thinly traded, and when you add into this equation the December market volatility we experienced, the end result was a microcap stock in free fall, all while the business really hadn’t changed too much (and 2019 was looking reasonably good). In the end, Aspen abandoned the equity raise, and got another $5m of non-dilutive financing from BASF instead. The stock has since stabilized, but it still sits at a pathetic valuation.

 

Valuation and Returns:

 

At a $75 million market capitalization, Aspen’s shares remain quite cheap. In my opinion, it’s rare to find a business that’s trading below its net-asset-value that also has a world-class technology and a long runway to grow. In 2019, the company expects to generate a small amount of “adjusted EBITDA,” and by 2021 I believe they will generate $25m of adjusted EBITDA. By this math, Aspen is available to investors today at roughly 3x.

 

If investors value this business at ~10x-12x EBITDA, this represents a ~233%-300% return.

 

Risks:

 

There are a few glaring risks associated with an investment in Aspen.

 

1) Aspen’s business today is tied to commodity prices (oil, natural gas), which are impossible to predict. Even worse, Aspen is tied to energy capital expenditures related to these commodity prices, which is even lumpier and unpredictable.

 

2) As we’ve already pointed out, this is a business with low gross margins and high fixed costs, which creates a lot of variability in cash flow generation. While Aspen's balance sheet doesn't have a lot of net debt, they don't have a lot of cash on hand either, which limits their flexibility.

 

3) Liquidity risk – ASPN is a thinly traded security, and as we’ve seen in December 2018, even a single investor can drive down the stock if there’s a panic

 

4)    Single operating facility - if something were to go wrong in their East Providence plant, this would materially impact the equity of the business

 

Conclusion:

 

As of writing, Aspen’s stock has rebounded from its lows in December by over 90%, but they still remain dramatically below intrinsic value.

 

Aspen shares are attractive because:

 

1) Aspen has a world-class technology

2) they have a long runway to grow

3) they trade at or below liquidation value, and

4) they are likely to generate significant cash flow relative to its current market capitalization

 

Disclosure: I / portfolios I manage maintain a position in ASPN.

[LC]

Thanks for the writeup.

 

Couple of additions (from an old article so this may be outdated)

 

https://www.cnet.com/news/high-tech-aerogels-wrap-homes-with-insulation/

 

1- There are other companies with similar technologies/products

 

Material company Cabot has also developed its Nanogel insulator for buildings. Another company, ThermaBlok, has had its insulation used in demonstration houses built during last year's Solar Decathlon home competition, where energy efficiency was a high priority.

 

2- For building insulation:

 

Does that mean you should consider hanging aerogel blankets on your walls, floors, or attic to boost insulation? Not necessarily. The higher upfront still cost means that it's best suited for buildings with walls that don't have a cavity--typically formed by wood framing--that can be filled, said Blair.

 

3- A concern is to how revenue has dropped over the past 3 years.

 

[patientcapital]

Thanks for your comments:

 

1. Cabot is not much of a competitor. According to my conversations, Cabot doesn't hardly sell any aerogel (probably less than $20m total since inception).

 

Aspen's headquarters is leased from Cabot in one of their buildings & Aspen's CEO came from Cabot. Aspen paid Cabot a bunch of money to cross-license their aerogel patents so they are in the clear. The bigger competitive threat isn't from Cabot, but the Chinese who tried to rip off Aspen by copying their technology. IP battles have been successful so far on that front.

 

2. I don't think aerogel makes sense for traditional home insulation, it costs too much. Aerogel's value proposition comes from tight spaces like a city apartment building (which allows you to fit more units in a building), or European retrofit insulation for old buildings, or where fireproof insulation is required. Below is the quote from my write-up:

 

"Aerogel’s value proposition in buildings is simple: it allows buildings to have thinner walls in tight spaces (think cities), or they can retrofit old walls with a thin insulation façade without overly changing the aesthetic. This later point is an area of focus for old buildings in Europe where regulations require these façades. Aspen's insulation is also A2 grade fire resistant which is rare for insulation and important for new safety regulations after the Grenfell Tower tragedy.

 

3. Please re-read section "End-Market Opportunities" in the write-up. It explains what's going on there.

 

[Spekulatius]

I would guess that Aerospace and space application would be a great fit for high performing lightweight insulation. Why didn’t they get into this space? Certification process too long?

Breakeven is a bit of a euphemism for adjusted EBITDA breakeven.

There is a big risk that they runout of money and it will be acquired for a song. I also think this was written up in VIC a while ago.

[patientcapital]

@Spekulatius

 

I think you're right that this is the bear case. Fortunately for us, it's priced as if the bear case is inevitable and there's no upside potential.

 

I think if you dig in and research their end markets, you'll see that there's a lot of traction behind the product and significant cash flows will be generated for this company if that is indeed true. They also just renegotiated their $20m revolving credit line to provide flexibility.

 

We can nitpick "adjusted ebitda," but it's a good proxy for cash flows from operations before changes in net working capital.

 

On aerospace - I imagine it probably works there as well. There are many places that aerogel has value, but their problem is one of choice. How do they choose where they focus their time? Clearly they've burned a ton of cash to date, so it's dangerous to spread themselves too thin, just a matter of resources if I had to guess.

 

I think Aspen did a good job to focusing on a space where Aerogel has a really high value proposition, and they've done a nice job growing that. Energy infrastructure was an awesome market for them while the oil capex cycle was going gangbusters, and over the past couple years they looked silly. It's reverting to the mean now.

 

Building materials is the biggest insulation market and I'm glad they are going there to find the high performance markets where aerogel makes sense. But aerospace is indeed attractive, but also like you said, long qualification cycles makes it hard to break in.

 

[LC]

Traditional fiberglass insulation is about $1/sqft - and you get R30 values with about 10 inches of insulation.

 

Spaceloft provides R30 with 3 inches of insulation - but costs $20/sqft buying it used from ebay (which I'm sure most real builders do not really do)

 

http://vi.raptor.ebaydesc.com/ws/eBayISAPI.dll?ViewItemDescV4&item=380906349501&category=63894&pm=1&ds=0&t=1525955152000&ver=0

 

Now, I take your point on certain situations where 7 inches of wallspace is truly at a premium.

 

Here is a skeptical review I found:

 

https://www.greenbuildingadvisor.com/question/spaceloft-my-only-option

 

That said, I am highly skeptical of the claims of this product because aerogel is a rigid material, basically a mostly-hollow brick made out silicon. This stuff comes in a flexible blanket. I have a hard time believing that it behaves the same as rigid aerogel. The way aerogel material works is by trapping an lot of air in billions of nanometer-sized pores. In a solid material, the integrity of these pores can be guaranteed. In a flexible sheet, how can it? If they're using flexible aerogel fibers or something (?), this would be an exceptionally delicate product. Curiously, I notice that there is no datasheet offered for Spaceloft.

...

But let's say I'm wrong that this stuff really performs as advertised. The best price they offer is $95/inch thick/square foot. By contrast, conventional insulation materials are literally in the ballpark range of to 100 times less expensive. at 3.5" thick, you're paying $332 per square foot of roof. You could, like, demolish the house and build a whole new one for that price given an average-sized attic.

So just a disclaimer I think that review was 4-5 years old, there is currently a datasheet out for the product and I am not inclined to doubt the company's claims. I think it's a good product at a bad price.

 

IMHO if they can make this cost-competitive with traditional fiberglass batts (or at least in the ballpark) - you have a chance at a real winner.

 

Also, the industry is littered with high-price, high-performance materials. Take a look at the zillions of concrete alternatives (bio-concrete, polypropylene concrete, etc.) for a glimpse. A lot of these don't take off because the traditional product gets you 90% of the way there for 90% less $$.

 

As a homeowner who wants to re-do some insulation, I'd love to get my hands on it at a reasonable price. But at 20x the cost of rolling fiberglass, it's just not worth it.

[Spekulatius]

Aspen Aerogels reminds me a lot of a company upstart I was offered a job in after my PhD in the fastener business. Unique technology that was proven to work, patent protected, licensensed the technology  to several big companies, funding for a production line, industry veterans in managment,  But even I could see back then that the manufacturing was very expensive. Target market was automobile industry. The company went under a few years later. There is a lot of tech out there that works, but isn’t cost effective. Gladly  I didn’t take the job

 

Aspen at least has a niche business, but I think they will have trouble to get broader penetration and make meaningful profits.

[dwy000]

Aspen Aerogels reminds me a lot of a company upstart I was offered a job in after my PhD in the fastener business. Unique technology that was proven to work, patent protected, licensensed the technology  to several big companies, funding for a production line, industry veterans in managment,  But even I could see back then that the manufacturing was very expensive. Target market was automobile industry. The company went under a few years later. There is a lot of tech out there that works, but isn’t cost effective. Gladly  I didn’t take the job

 

Aspen at least has a niche business, but I think they will have trouble to get broader penetration and make meaningful profits.

 

+1

 

Awesome write up by the way!  Whether you agree or not with the conclusion, you have done a ton of top quality research here so kudos for that.  Nicely done.

 

I agree with the comment that wonderful technology doesnt always win the day. In this case I think the fact that the margins are so low is evidence of the fact that the technology may be better but not better enough to justify the cost (maybe for now).  Apparently there are other options that prevent it being priced at a level that aligns with the risk and fixed costs.

 

Good luck.

 

 

[patientcapital]

Appreciate the comments. Interesting to hear the skepticism.

[rkbabang]

Aspen Aerogels reminds me a lot of a company upstart I was offered a job in after my PhD in the fastener business. Unique technology that was proven to work, patent protected, licensensed the technology  to several big companies, funding for a production line, industry veterans in managment,  But even I could see back then that the manufacturing was very expensive. Target market was automobile industry. The company went under a few years later. There is a lot of tech out there that works, but isn’t cost effective. Gladly  I didn’t take the job

 

Aspen at least has a niche business, but I think they will have trouble to get broader penetration and make meaningful profits.

 

When I was a teenager my uncle was all excited about a company "Quadrax Advanced Materials", they had these composite materials that were extraordinarily strong and lightweight.  They were perfect for applications in aerospace, sports (tennis rackets, ski binding, etc), automotive, and all sorts of other things.  I guess the materials were pretty good, Salomon made Quadrax ski bindings for few years.  Anyway the stock still found a way to go to zero.

 

He talked my parents and I (who was 18 years old) into investing.  I think I invested $1000, which was quite a lot for an 18 year old kid in 1990.  That was my first stock investment and I learned that a company can have a great product but still be a bad investment.

 

[patientcapital]

http://ir.aerogel.com/investors/news/news-details/2019/Aspen-Aerogels-Inc-Awarded-PTT-LNG-Insulation-Contract/default.aspx

 

This contract win is a significant development for the company.

 

Keep in mind that a $35-40m project is very significant to ASPN in the context of the $105m of total revenue for last year.

 

Management guidance is for +20% revenue growth in 2019, and I believe that number is actually closer to 25-30% growth before factoring in this deal. This means that growth may exceed +30% and any excess revenues can build a healthy backlog of 2020 growth.

 

As capacity utilization skyrockets, their margins quickly improve and this pulls forward the cash flows they will generate.

[patientcapital]

For those still following the story despite the run up in stock YTD:

 

The Youtube channel Veritasium did a few fun videos on aerogel this past month.

 

In the second video, around the ~10-11 minute mark they talk about aerogel blankets, and at the very least, the 2nd one they show (the red-ish one) is certainly made by Aspen, their Pyrogel product. It sounds like in their next and last video, they are going to test the thermal properties of the pyrogel, which should be interesting.