If you’ve followed Macro Ops over the last year, you know we love Ammo, Inc. (POWW).
POWW makes various types of ammunition for both recreational and military/government applications. Their most popular product, STREAK, is unlike anything else on the market and easily 5-10x better than its competitors’ offerings. STREAK is the industry’s first non-incendiary tracer bullet, allowing only the shooter (and those behind them) to see the bullet’s flight path.
Since we first bought shares, POWW’s seen dramatic revenue growth, reported its first quarter of profitability recently, and expanded its market cap nearly three-fold.
This week we’re reviewing POWW’s latest acquisition, GunBroker.com, which POWW closed in May. GunBroker is the world’s largest online marketplace to legally buy and sell firearms and firearm accessories.
Founded in 1999 by Steve Urman, the company dominates a highly fragmented market with over 6 million registered users and $2B+ in cumulative revenue.
Here’s why the acquisition matters. By buying GunBroker, POWW transforms itself from a commodity-based product manufacturer to an online marketplace serving 6 million firearm fanatics with multiple ways to expand revenue and margins. The competition (i.e., legacy ammo manufacturers) remain asleep at the wheel, stifled by their large size and bureaucratic operating model.
In this piece we’re going to review GunBroker’s history, why its marketplace is structurally advantaged against its competition, and how POWW will use this to expand market share.
Let’s get to it.
The Great Unbundling: How GunBroker Captured A Niche eBay Community
eBay stopped auctioning guns on its site in 1999. You can read eBay’s stance on firearm auctions here. Three months after that decision, Steve Urvan launched GunBroker.com.
GunBroker’s founding is a testament to the power of serving hyper-niche communities within existing marketplace infrastructures. Urvan unbundled a small community (gun buyers/sellers) from eBay’s more prominent platform to create his marketplace.
Greg Isenberg, the founder of Late Checkout, explains the power of unbundling in his essay The Ultimate Guide to Unbundling Reddit (emphasis mine):
“That interconnectedness is what makes Reddit great, but for the system to work, each community has to conform to the one-size-fits-all mold of a subreddit. One size fits all, but it doesn’t fit anyone particularly well. That creates unbundling opportunities. There are hundreds of wonderful startups waiting to be built using this simple strategy: create a product that serves the unmet needs of an individual subreddit.”
Replace “subreddit” with “eBay community,” and you have GunBroker.com.
In fact, there’s nothing different about GunBroker’s business model from eBay. The company operates as an auction/listing site that carries no inventory. Instead, it facilitates transactions between vetted third-party sellers and buyers. Auctions have reserve prices, time limits, and “Buy Now” options.
Like any online marketplace, GunBroker grew slowly, then all at once. For example, it took the company 10 years to reach $1B in cumulative online sales. Once it hit $1B, it only took 3 years to get $2B.
Two years after that, they did $4B in cumulative sales. Similarly, it took GunBroker 9 years to reach 1M registered users. From there, it took only three years to get 2M registered users.
Let’s dive deep into GunBroker’s marketplace to see why the company grew at such a rapid clip.
GunBroker’s Marketplace: Serving 6M Gun Enthusiasts & The Marketplace Trust Spectrum
Marketplaces survive on trust. There are layers to this trust, too. The seller must trust that the buyer will pay in full. And the buyer must trust that the seller delivers what the buyer agreed to purchase.
When it comes to marketplaces, trust operates on a spectrum depending on the type of product sold. For instance, a marketplace that sells commoditized, $5 widgets carry a lower “trust weight.” It doesn’t hurt as much if that $5 widget breaks too quickly or isn’t the exact color. It’s $5, and there’s an element of “you get what you pay for”-itis.
Then there’s the opposite end of the spectrum, like residential real estate. Over at this end, trust is everything. The buyer is prepared to spend tens of thousands of dollars on what is likely the largest purchase they’ll ever make in their lives.
Buying and selling guns falls on the “trust heavy” side of the spectrum. There are three main reasons for this. First, selling guns is a regulatory-heavy process.
Both the buyer and seller need to either have a Federal-Firearm License (FFL) or coordinate with a local dealer that possesses an FFL. Buyers and sellers that breach this initial trust agreement can face severe consequences such as extended jail time and a permanent ban from the GunBroker platform.
The second reason firearms are “trust heavy” products is that they’re expensive. A quick sort of GunBroker’s currently available rifles shows the highest-priced rifle, a Perugini and Visini Selous Sidelock Double, clocks in at $59,500… GunBroker’s largest-ever firearm sale was $140,000.
In other words, the item’s price is positively correlated with the trust required between the buyers and sellers in the marketplace.
Finally, firearms are valuable collector’s items, much like art, sports cards, or shoes. The marketplace that verifies such things plays a vital role in the integrity of the collectible item.
Take sports cards, for example. PSA is the world’s largest and most trusted card authenticator and grading company. The items that pass through PSA’s platform are more valuable than items outside the platform. Why? Because PSA has built trust within the sports card collector community. They’re a symbol of authenticity, a trusted verification source.
GunBroker fulfills those needs of gun buyers. Buyers know that any gun available on the GunBroker platform is vetted and verified for authenticity, seller trust, and FFL compliance.
How GunBroker Makes Money
There are two ways GunBroker makes money: final value fees and optional services.
Final value fees are basic. For any sale <$250, GunBroker takes a 6% fee of the final sale price (i.e., $15 in revenue for a $250 final sale price). For any item over $250, GunBroker takes 6% of the first $250 plus 3.5% of the remaining final sale value after $250.
Say I’m selling a rifle for $5,000. GunBroker takes the first 6% on $250 ($15) and then 3.5% on the remaining $4,750 (or $166.25). In total, GunBroker makes $181.25 on the transaction.
The second way GunBroker makes money is through optional services like premium listings where sellers can pay to draw more attention to their for-sale items. Optional services include things like colored titles, featured listings, and on-site sponsorships. These services range between $1 and $7 per post.
According to POWW, GunBroker generated over $60M in 2020 revenue and $40M in EBITDA.
At this point, we know GunBroker’s history, its marketplace dynamics, and how it makes money. Now let’s discuss GunBroker’s two structural advantages: network effects and defensible data.
GunBroker’s Structural Advantages: Network Effects & Defensible Data
Investors love marketplace businesses because they tend to create massive scaled network effects.
As the world’s largest online marketplace for firearms and firearm accessories, GunBroker possesses a firearm marketplace’s most robust network effect. There is no reason for a gun owner to list their gun on any other website becuase GunBroker has the most buyers. And for buyers, GunBroker offers the most extensive assortment of firearms and accessories. Why look elsewhere?
These network effect dynamics allow GunBroker to generate significant amounts of defensible data on firearm and accessory sales. In my essay Great AI Companies: What They Are And How To Find Them, I quote William Vorhies of Data Dominance on the power of defensible data (emphasis mine):
“To create a successful AI company you must create such a wide moat that no one can catch up unless they pay your price. That moat is not about technology. There are essentially no monopolies on deep learning technologies, only leaders that can quickly be copied.The secret to a wide moat in AI is to have a virtual monopoly on the data you are using to train. In this case monopoly also means such a large lead in users and data volume that no one can reasonably catch up.”
How does defensible data apply to GunBroker and POWW? POWW’s competition (i.e., other gun and ammo manufacturers) have access only to company-specific data. Ruger, for instance, knows how many Ruger-specific rifles they’ve sold to customers.
GunBroker centralizes this purchase data and provides POWW insights into what products its 6M+ customers are buying. And, more importantly, whom they’re buying from.
How Will POWW Use GunBroker?
There are two easy ways POWW can leverage its GunBroker acquisition. First, it can snatch low-hanging fruit by selling its ammunition products direct to consumers. Ammunition sales represented ~3% of GunBroker’s 2020 revenues (roughly $1.8M).
POWW can sell its popular, patented ammunition through GunBroker’s platform and quickly increase that revenue percentage split. Second, GunBroker allows POWW to generate a substantially higher margin profile than its competitors. For example, GunBroker generated ~87% Gross Margins last year, according to CFO Rob Wiley.
Over the next year, Rob estimates that 1/3rd of POWW’s revenues will come from GunBroker and 2/3rds from ammunition sales.
Here’s the exciting part. The more that revenue split shifts to GunBroker, the higher POWW’s incremental gross and operating margin profile. Should POWW generate 2/3rds of its revenues from GunBroker, gross margins could reach 50-70%. In turn, this should lead to multiple expansions as investors pay more for a higher-margin business.
The third and most challenging use case for GunBroker is creating own-brand products based on purchase data insight. Collective members know that own-brand conversion is a leading driver in our Westwing (WEW) thesis.
Simply put, marketplace owners (like POWW) can see which products are selling the most and then use its manufacturing capabilities to create their own version of that product. In doing so, the company makes a higher-margin product to meet customer demand.
The acquisition of GunBroker transformed POWW from a commodity-focused product manufacturer to a DTC online marketplace with 6M+ registered users and structural competitive advantages.
POWW can efficiently cross-sell its popular ammunition products through the platform while simultaneously meeting the needs of its active customer base. Moreover, the acquisition is a move away from intermediary sellers like third-party retail stores and wholesale partners.
Five years from now, POWW will look completely different. The company will use its DTC marketplace to generate SaaS-like margins by selling third-party and own-brand products to millions of dedicated customers.
POWW is moving faster than its peers, who frankly don’t seem to care about developing a marketplace or direct relationships with its customers.
Most investors see a commodity-linked business benefiting from short-term supply constraints and high geopolitical-incited demand. Those who miss the point and miss an opportunity to invest in a company disrupt one of America’s most boring industries.