Aspen Aerogels (NYSE:ASPN) made a significant announcement on Monday after the market closed. The company successfully converted a letter of intent (LOI) with Audi into a binding supply award, marking a pivotal step for its PyroThin thermal and fire barrier materials. Production is set to commence in 2025, underscoring the robust partnership between the two entities.

Additionally, Aspen shared another positive development by confirming Scania as the brand previously revealed for a commercial vehicle supply agreement with Volkswagen (VWAGY). This adds more credibility to the company’s prospects.

Furthermore, Aspen updated its revenue and adjusted EBITDA projections for 2023. The company now anticipates exceeding $225 million in sales, a more optimistic outlook than the previous range of $200 million to $250 million. As for adjusted EBITDA, the previous guidance of a $50 million loss at the midpoint of its outlook has been reduced to $35 million.

With the stock now trading 25% higher than the previous day, the question arises: Is Aspen’s stock still a wise investment? Let’s evaluate the pros and cons.

The Upsides of Monday’s News

The transition from an LOI to a supply award is the most significant aspect of the Monday announcement. An LOI merely outlines the broad terms of an agreement and is non-binding, while a letter of award (LOA) is a legally valid and binding contract that signifies a secured supply agreement. Aspen’s transformation from Audi’s potential interest in the company to a confirmed partnership starting in 2025 is a promising sign for shareholders.

In May, Aspen reported winning a contract for PyroThin with a European EV commercial truck program, identified as Scania Group, a Volkswagen commercial automotive brand. This project is expected to commence early next year. These developments indicate that Aspen has secured significant contracts with two prominent Volkswagen brands.

Aspen’s CEO, Donald Young, expressed confidence in receiving additional design awards by the end of the year, which are expected to make a substantial contribution starting in 2024 and further accelerating in 2025. The company’s confirmation of staying on track to achieve these goals is reassuring.

The update on revenue and EBITDA for 2023, while not a slam dunk, is undoubtedly positive.

The pivotal question is whether a single award announcement justifies a 25% one-day surge in the stock’s price.

The Challenges

Despite the positive news, ASPN stock is currently trading at 2.6 times its projected 2023 sales. While this is below its five-year average price-to-sales (P/S) ratio of 3.6, it remains relatively high for a company that relies on the successful realization of sales from these design awards. Unfortunately, such awards sometimes fail to materialize.

Aspen’s ambition to achieve a revenue capacity of over $550 million, based on 20% annual revenue growth beyond 2023, may take four to five years to materialize. The company’s cash position has also decreased significantly in the past two quarters, potentially necessitating additional capital in early 2024.

Furthermore, Aspen’s Altman Z-Score, a measure of bankruptcy risk, currently stands at 1.04, indicating potential financial distress if the expected awards do not materialize.

The Bottom Line

Aspen’s stock closed at $6.67 on Monday, surging to the mid-$8 range with the recent awards and guidance. It’s neither a $6 stock nor a $9 stock, suggesting a midpoint around $7.50.

For those considering options expiring in six months (April 19, 2024), the $7.50 call has an asking price of $2.50 with a delta of 0.70477. Should you buy these calls and intend to exercise your right to purchase shares at $10, they must appreciate by at least 19% over the next 178 days for you to double your investment. The $7.50 put option has a $0.50 bid, offering an annualized yield of 12.1%. In this scenario, the shares would need to fall by 17% before you start losing money.

Both options come with their uncertainties, so it might be prudent to observe the situation for a few days before making a decision.

Featured Image: Freepik @ wirestock

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