KULR TECHNOLOGY: CHARGING TO ‘GROWTH TURNING POINT’ (NYSE: KULR)

KULR Technology Group (NYSE: KULR) has become a leader in professional battery thermal and safety management.Products here include thermal components and software tools critical to protecting and monitoring lithium-ion batteries considered potentially explosive Under certain circumstances. The appeal here is the huge market opportunity in applications for electric vehicles, energy storage systems and industrial equipment that require these types of solutions.

The company is strengthening its commercialization strategy, and its credibility is backed by major corporate contracts and even NASA, which uses KULR solutions on the International Space Station. While the stock is high risk considering recurring losses and negative cash flow, we emphasize that growth is expected to accelerate through 2023, supporting a more positive long-term outlook.

What does KULR do?

KULR targets the growing demand for high-performance batteries and electronic systems that operate cooler, lighter and safer. KULR’s thermal management solutions span the entire life cycle of lithium-ion batteries and related electronics.

The idea here is that companies can incorporate KULR’s “thermal runaway shielding” and “anti-passive propagation” solutions into the initial design and testing phases of new battery products. Use cases extend to safe shipping and recycling. Some practical advantages over alternative solutions include light weight and low contact pressure requirements.

The revenue model covers design services, product sales, IP licensing, and subscription opportunities, all of which are expected to expand in the future. We mentioned NASA, but other high-profile clients include defense and aerospace leaders such as Lockheed Martin (LMT) and Raytheon Technologies (RTX), as well as Airbus (OTCPK:EADSF).

A featured product is the “CellCheck” battery management platform, which combines real-time monitoring of key performance and safety metrics such as temperature, humidity, discharge rate, and connection to a software platform. The value proposition to customers here is to provide the world’s “smartest battery” with built-in safety features. The recent commercial launch is expected to be a growth driver in the coming quarters.

KULR management sees a multi-billion dollar market opportunity, with global sales of thermal management materials climbing from $11.1 billion in 2019 to $16.2 billion in 2024. From the growth of electric vehicles to lithium-ion recycling that requires safe transportation, everything can benefit from KULR solutions. Seizing the incremental portion of this opportunity alone represents a bullish case for the stock.

KULR key indicators

The company last reported its second-quarter financials in August, with revenue of $588,000, down from $628,000 a year earlier. Having said that, the context here is the timing of new product launches and the lag in recognition of some large orders. SG&A was up 59% year over year, which included driving marketing and expanding the sales force, showing that the business’s growth efforts were evident.

Overall, the year-to-date operating loss has been -$9.3 million, even though the company reported cash of $13 million at the end of the quarter. With negative cash flow expected to continue for the foreseeable future, the strategy will be to raise capital through additional equity offerings. Following the quarter, KULR announced a stand-by equity purchase agreement in excess of $50 million, which management believes enables the company to appropriately expand and scale.

There’s little to fault on the objectively weak financial side. That being said, a few developments in recent months have made the stock interesting. The first point here is a series of headlines with new contract announcements. In September, KULR received approval from the Department of Transportation to increase the energy-level shipping certification for its “SafeCase” product to 2.5 kWh batteries. This opens up new business opportunities for large-scale deployments that need to provide such certification to end users.

Separately, the company announced a new contract with a Fortune 500 airline to develop a new electric vertical take-off and landing (eVTOL) aircraft battery. This is an exciting high-growth market segment where the implementation of high-performance battery design and thermal safety is naturally very important. Understandably, as the eVTOL market takes off, this particular customer may need more orders.

Finally, the latest update is a $500,000 initial deployment order from a leading “DoD contractor,” with a multi-million dollar relationship under consideration for the next year. This case highlights applications related to drones and autonomous technology that contain batteries that require thermal protection.

Taken together, earnings will be stronger in the quarters ahead as these types of engagements are recognized. Management addressed the prospect on the earnings call:

We believe we are at an inflection point in KULR’s growth path. Over the past year, we have invested heavily in R&D, facility infrastructure, SG&A and building a high-quality workforce. These strategic investments have led to the construction of our overall battery safety platform, providing customers with a broad set of solutions to achieve battery sustainability in their respective ecosystems…

In the customer interactions we are working closely with, we expect their business volume to increase in the second half of 2022 and into 2023.

When it comes to valuation, goals are limited, management lacks guidance, and there isn’t much to do. We know that the company generated about $2.2 million in revenue in the past year, which will climb to $3.2 million by 2022. By this measure, KULR’s forward sales multiple is 69 times.

Even more favorable is the outlook for 2023, where increased commercialization strategies could drive revenue close to $34 million, in line with the current consensus of two Wall Street estimates indicating an inflection point for growth. There’s a lot of uncertainty around that number, but if KULR can get close to it, driven by the coming quarters, we have a solid growth stock anyway.

KULR share price forecast

We rate KULR a Hold ahead of the company’s upcoming third-quarter earnings report on November 9. The report will also give management the opportunity to report on the latest updates.

The good news for KULR is that the stock has staged an impressive rally over the past month, nearly doubling from its October low of $1.06. With a current market cap of around $200 million, this extreme trading volatility is expected to reflect the speculative nature of the stock. Shares should maintain some bullish momentum as long as the stock holds support around $1.60.

The bullish scenario is that the market adoption of KULR Technologies’ products accelerates with increased orders and an expanded customer base, which translates into a firm earnings outlook. Monitoring points here include gross margins and regular strings detailing the company’s development of new contracts.

Fundamental weaknesses, on the other hand, can be traced back to cash flow trends. If liquidity becomes an issue, larger stock issuances will be required to raise capital and dilute existing shareholders. A certain increase in the number of outstanding shares can be tolerated if it is conducive to expanding growth. 2023 is critical in this regard. Investors need to view this as a long-term story that may take many years to play out.