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The company’s order backlog decreased in Q3 (from $35M to $27M), which we view as a positive as the company fulfilled more orders. However, inventory slightly increased, stretching the company’s working capital, which is a negative.

In terms of capital, the company reiterated its ability to fund growth without accessing the equity capital markets; here is Chuck Scheiwe, CFO, per the transcript: “We believe that our existing cash and additional funding available under the credit facility from SVB and our subordinated LOC will be sufficient to meet our anticipated capital resources to fund the planned operations for the next 12 months. We fully intend to avoid raising equity capital prior to reaching profitability. We are on track executing to our gross margin improvement and our cost control initiatives. We’re also exploring increases to our working capital availability.”

Valuation

We are encouraged by the company’s revenue trajectory and focus on margin improvement to drive it towards profitability. Moreover, we are optimistic that the company’s increased access to credit will encourage continued restraint as it relates to equity issuance; this has been a significant overhang on the stock.

Despite a significant increase in its share price, both in the leadup to earnings as well as subsequently, the company trades at 1.3 times trailing revenue versus over eight (8) times average ratio for peers.

Looking at estimates for 2023, the company trades at 1.1 times revenue versus peers at approximately five (5) times.

As we think through valuation, the asymmetry appears favorable. Trading at the lower end of the peer group (excluding traditional battery maker Enersys (NASDAQ: ENS), which is a low growth, legacy maker) would put the multiple at around three times on estimated 2023 revenue of approximately $60M, or around $11 per share. If revenue estimates are met but the market compresses multiples due to further rate hikes, downside is a little under $4; failure to achieve revenue combined with compression would see even further downside. If revenue targets are exceeded and the stock is re-rated toward its peers’ multiples, upside is significant. As a point of reference, the stock is covered by three (3) sell-side research firms; price targets for these firms are $6, $8, and $15.

FLUX peer group. Source: Bloomberg, Formidable estimates.

Current as of 11/18/2022

Our prior research provided a deeper dive on the secular tailwinds we think position Flux for success. However, its clients face the same macroeconomic headwinds we see daily (high inflation, Fed tightening, weakening demand). Risks remain as the company must find ways to fund its continued growth using existing sources of capital against a backdrop where borrowing is becoming more expensive. Achieving cash flow breakeven and profitability are of paramount importance to the company and its investors.

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