Ammo Inc (POWW): Q1 2022 Earnings Recap

POWW is an ammo and ammunition accessory manufacturer that sells its product through third-party retailers and its online marketplace, We’ve followed the company since May 2020, and it is one of our largest positions in the portfolio. 

POWW reported earnings on Monday (08/16) and crushed it. Here are some of the highlights: 

  • Revenues increased 360% YoY to $44.5M ($12.3M from 
  • Net Income increased from -$3.1M to +$9.5M 
  • Adjusted EBITDA increased from -$0.3M to +$16.3M
  • Gross Margin increased from 11.1% to 42.7%
  • Revenue backlog of $238M 

Additionally, the company revised its FY2022 revenue and EBITDA guidance up to $210M and $70M, respectively. POWW expects to generate ~$51M in revenue next quarter and $60M in Q3. 

This was an excellent quarter on every front. But there are a few things I want to emphasize in this recap. 

First, POWW is just starting to expand its marketplace offering. We should see increased marketplace revenue over the coming quarters and subsequently higher gross margins. 

Next, the company has a strong balance sheet with $50M in cash against ~$46M in total liabilities. POWW will likely make strategic investments with that cash instead of keeping it in the bank, which we’ll discuss later. 

Finally, Wagenhals is building a business that will grow significantly larger than he initially expected. Which begs the question, why is Wagenhals — an elderly man with enough money to retire for a couple lifetimes — determined to build this business? 

I asked him that exact question during the earnings call and will share the answer below. 

Alright, let’s start with the acquisition. Immediately Contributes To Margin Expansion

GunBroker added $12.3M of high-margin revenue this quarter and helped POWW achieve a 42.7% total gross margin. Over time, POWW will generate substantially more revenue from its marketplace than its traditional ammo manufacturing segment. 

Here’s the exciting part. The current 42% GM print could be the floor for POWW’s future gross profit margins. CFO Rob Wiley explained this in the earnings call (emphasis mine): 

“No. We don’t expect any margin degradation. In fact, looking on to our next quarter, with the full 3 months of GunBroker activity, coupled with our increasing Ammunition operations and leveraging that platform, we expect our margins to end up in approximately 45%, conservatively. And you mentioned just how our adjusted EBITDA may seem low in comparison to the increase in guidance. Historically, we feel like we’ve been conservative with our guidance, and we’ll update TheStreet on potential updates on guidance as we feel necessary.”

I wrote about GunBroker’s business and what it means to POWW, which you can read here. In that piece, I noted that historically, GunBroker did ~87% gross margins. And if POWW managed to generate 2/3rds of its revenue from GunBroker, we could see a total gross margin between 50-70%. 

The GunBroker acquisition changed everything about our bull thesis. Initially, we had ~30% gross margins as our most-Bullish investment case. Our reason? Premium pricing on highly differentiated ammunition products. 

Now there’s a chance POWW generates ~20% run-rate EBIT margins operating a large and growing online firearm marketplace. Talk about a multiple re-rating opportunity.  

This brings us to management’s latest expectations for its GunBroker marketplace. CEO Fred Wagenhals said that the company will push ~$25M of POWW products through the marketplace during FY2022. 

Investors (and gun enthusiasts) should see these products hit the marketplace within the next 30 days. Additionally, POWW will sell both ammunition and non-ammunition products. Management didn’t disclose what “non-ammunition” products it would sell, however. 

Whatcha Gonna Do With All That Cash Inside That Bank

As we mentioned earlier, POWW has ~$50M in cash in the bank. They don’t need that much cash sitting there, so what should they do? We asked Wagenhals this question during the earnings call, and he responded saying (emphasis mine): 

I think you see some of that money moving into another vertical, something that must be accretive. We do generate, frankly, a large amount of cash, but there are opportunities out there that we look at on a regular basis. And if they do match our — what we require, some money would go there, could go to beefing up GunBroker with more machines. There’s not one setting where we would spend our capital.”

So it looks like there are two possibilities for future capital allocation: 

  1. Buying another business inside the ammunition product vertical 
  2. Investing excess cash into growing’s online marketplace

Let’s start with the first option, buying another vertical business. In this scenario, POWW would likely buy a gun accessories business (holsters, optics, slings, etc.) or one related to ammunition production (gun powder, recycling lead, etc.). 

As long as they don’t buy a gun manufacturer, they should be okay. Currently, I’m skeptical that POWW has the brand power to sell gun accessories at decent margins. Hopefully, that changes over time. But for now, we’d love to see them add another vertical in the ammo production supply chain. 

The other option is to invest in the online marketplace. There are a couple of possibilities POWW has at its disposal here, each of which helps consolidate the highly fragmented online ammo/gun space. That said, these options are a bit “out there.” 

First, POWW could build a mobile-first offering into its platform. Yep, I’m talking about apps. Currently, there’s only one gun/ammo listing app on the iPhone App Store: currently doesn’t have a mobile presence, which is a borderline corporate crime in 2021. Investing in a clean, sleek mobile experience for its 6M+ active users will have two significant benefits: 

  • Gives POWW another vehicle to cross-sell or monetize own-brand products
  • Allows POWW to capture younger demographics earlier in their gun/ammo buying lifecycle

Then there’s the second option, which is to upgrade the back-end infrastructure to address some low-hanging issues. For example, one major complaint about GunBroker is its lack of customer service. 

It doesn’t suck. It just doesn’t exist. POWW can invest in a legitimate customer service team to assist gun collectors through high-dollar/high-stress transactions. Remember, trust is everything in an online marketplace. Trust between the buyers, sellers, and the marketplace itself. 

The second major complaint surrounding GunBroker is its payments infrastructure. POWW should have the resources to invest in the most seamless payments experience for the customer to reduce friction at the point of sale. It’s impressive that GunBroker has grown despite these apparent issues. 

Why Wagenhals Won’t Quit

Fred Wagenhals is 79 years old yet still wakes up at 5:30AM and works 5 days a week. Wagenhals doesn’t need the work, either. In fact, he has enough money for a couple lifetime retirements. So why build an ammunition marketplace business from scratch? 

I asked Wagenhals this question during the earnings call and loved his response (emphasis mine): 

“I like business. I like the sound of this. And I guess when my partner [indiscernible] stepped down [indiscernible] a few years, 3 years ago, we said, I think we can build a nice little ammunition company that’s profitable. Now we sit here and say, I think we can build a big ammunition that’s very profitable. So it’s the thrill of the deal. I like the deal. I like what I’m doing. I think we’ve got a great staff of people. I think this company — I did $407 million a year in sales one time with my old company, I think we can beat that in the next 2 years. So my goal is record-setting and beating records. So I’m excited to be here.”

It’s the thrill of the deal. Most importantly, Wagenhals sees a path to sustained, long-term wealth creation. In fact, he even admitted that he thinks POWW can beat ~$400M in sales in the next two years. 

If that’s true, it puts the company at <2x 2024E sales — a silly valuation for a company growing top-line revenue at a 100%+ 4YR CAGR. 

Concluding Thoughts: Another Great Quarter

POWW delivered another fantastic quarter while revising forward guidance higher. We continue to own it as one of our largest positions in the portfolio. The company is in the early stages of building its online marketplace business. Plus, management sees a path towards a 45% gross margin in the next quarter. 

A few years later, it’s possible that POWW prints 50-70% total gross margins with high-teens EBIT margins. We’ll continue to monitor’s revenue growth, its percentage of total revenue, and how well POWW sells its products through the marketplace. 

POWW’s end game looks completely different than when we first invested. The company went from a potential acquisition target to a company that can dominate its industry.

Subscribe To Our Newsletter

Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.