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AMMO, Inc. (POWW) is an ammunition and ammunition accessory manufacturer that sells its products through third-party retailers and its online marketplace, GunBroker. We’ve followed the company since May 2020, and it is one of our largest positions in the portfolio. POWW reported earnings on Monday, Aug. 16, and crushed it. Here are some of the highlights: 

• Revenues increased 360% year-over-year to $44.5 million ($12.3 million from GunBroker).
• Net Income increased from -$3.1 million to +$9.5 million.
• Adjusted EBITDA increased from -$0.3 million to +$16.3 million.
• Gross Margin increased from 11.1% to 42.7%.
• Revenue backlog of $238 million.

Additionally, the company revised its FY2022 revenue and EBITDA guidance up to $210 million and $70 million, respectively. POWW expects to generate ~$51 million in revenue next quarter and $60 million 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 GunBroker 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 $50 million in cash against ~$46 million 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 GunBroker acquisition. 

GunBroker Immediately Contributes To Margin Expansion

GunBroker added $12.3 million 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: 

“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 two/thirds 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 ~$25 million 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. 

What are You Going to do with All that Cash Inside that Bank

As we mentioned earlier, POWW has ~$50 million 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 by saying: 

“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 GunBroker’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 fine. 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 GunBroker 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 GunBroker platform. Yes, I’m talking about apps. Currently, there’s only one gun/ammo listing app on the iPhone App Store. GunBroker currently doesn’t have a mobile presence, which is a borderline corporate crime in 2021. Investing in a clean, sleek mobile experience for its 6 million and more 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 GunBroker back-end infrastructure to address some low-hanging issues. For example, one major complaint about GunBroker is its lack of customer service. It's not bad, 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

Wagenhals doesn’t need the work. 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: 

“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 ~$400 million 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%+ four-year 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 GunBroker’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.