Byrna: Outgunned by the Competition
Future growth and profitability could be tempered by escalating competition.
We sold our stake in Byrna and will continue to monitor it.
Byrna Technologies ($BYRN) [$15.15, MC: $345m] leads the market in less-lethal launchers (LLLs), which resemble guns but are CO2-powered and fire either kinetic or irritant projectiles like tear gas or pepper spray. While Byrna didn't invent the industry, they've been instrumental in popularizing it among consumers in recent years.
While we have faith in the emerging industry and Byrna's prominence within it, we hold that the forecasted financial performance does not warrant the current high valuation. With increasing competition, we expect that revenue growth and margins will suffer.
LLLs are popular with gun owners that recognize that using lethal weapons is not always the best solution, as well as with people that don’t want to or are unable to own a gun but want a self-defense weapon. Many police departments are also increasingly using LLLs as part of their arsenal.
Byrna's growth has been extraordinary, with sales skyrocketing from $250K in 2018 to $42.6 million in 2023. Given that Q1 2024 revenue hit $16.6 million, which is typically the slowest quarter, it wouldn't be surprising to see Byrna surpass $60 million in sales in 2024, continuing its current growth trajectory.
The CEO forecasts that sales will approach $100 million in the next 2-3 years and could rise to $150 million within 5 years. He anticipates achieving an EBITDA margin in the mid to high teens and an EBITDA in the 20s once sales surpass $150 million. He suggests that the "terminal value of profitability is likely around 30%." Therefore, at $150 million in sales, this would correspond to an EBITDA of $45 million.
Unfortunately, we do not believe the current trajectory will continue due to intense competition in the LLL industry as highlighted at the recent Shot Show. We also believe that the valuation of BYRN has surpassed a fair value for the company.
The company currently trades at an EV of $333 million, which translates into 2028 EV/Sales of ~2x and EV/EBITDA of ~7.5x. This valuation seems fair to us if it were based on next year’s performance, but they are based on metrics 5 years in the future with significant uncertainty.
Paying 5.5x 2024E sales today with non-meaningful EBITDA appears to be too high, especially taking into account the challenges Byrna is starting to face from competition.
[Grimburg, a much smaller competitor, recently did a private fundraise at a $3 million valuation.]
Competition:
Byrna has become the most recognized name in the LLL market, largely due to its robust marketing strategies, especially through endorsements from conservative talk show hosts like Sean Hannity. The brand name "Byrna" has become as synonymous with LLLs as "Kleenex" is with tissues.
This strong brand recognition serves as a significant competitive edge for Byrna, creating a halo effect around its products. Many consumers, influenced by Byrna's advertising, are inclined to buy its products without considering alternatives.
However, customers who do research LLLs thoroughly before making a purchase are less likely to choose Byrna, as competitors now offer LLLs that are both superior in performance and or more affordable than Byrna's offerings.
Competitors have recently introduced several highly competitive LLLs relative to Byrna’s flagship product the LE that costs $479:
Salt Supply S2 ($229 launcher only; $300 with accessories)
Identical specs at 40% discount
Equal to or better than in build quality
Equal to or better performance
Similar size as Byrna LE
40% cheaper than Byrna LE
100% of reviews that we read and saw comparing the Byrna LE and the Salt Supply S2 prefer the S2
Grimburg Gavle ($500)
2.5x more powerful for increased stopping power
Significantly stronger performance than Byrna LE (39 joules vs 16 joules)
Only holds 5 kinetic rounds, no magazines making it difficult to reload
Same price as Byrna LE
Excels at kinetic rounds, but can shoot irritant balls too
Sabre Launcher ($130-$150)
75% cheaper budget launcher with similar performance
Similar speed as Byrna LE
Excels at pepper balls more than kinetics
75% cheaper than a Byrna LE
There are also numerous other competitors coming out with additional competitive products including Umarex, PepperBall, and Paradigm.
Our comparison does not consider the nuanced differences between LLLs, such as the method of puncturing the CO2, loading, and other features. Although we recognize these factors may influence consumer choices, we maintain that price and performance are the primary determinants in the purchasing decision of an LLL.
In the field of law enforcement, Byrna faces competition from numerous other products offering less-lethal solutions. It was not unexpected when Byrna stated during the Q1 conference call that they are now reevaluating their strategy in the domestic law enforcement market.
We believe that Byrna will maintain its leadership in the LLL market yet concerns about growth and profitability are expected to intensify in the coming 12 months due to escalating competition.
Why we could be wrong:
Market size may surpass everyone’s expectations:
Byrna has excelled in promoting LLLs, yet it remains a specialized market. In contrast to firearms, which see over 16 million sales annually in the U.S., the LLL sector is still emerging. Approximately 400K Byrnas have been sold, with the company holding an estimated 85%+ market share. The LLL market could expand more rapidly than anticipated, allowing Byrna to exceed growth forecasts, even with a reduced market share.
The entry of more competitors could actually bolster marketing efforts across the U.S., potentially benefiting the entire industry.
The outlook for the industry is positive, with expectations that LLLs will gain broader acceptance both with gun owners and non-gun owners.
The low barriers to entry, stemming from minimal intellectual property protection and the ease of manufacturing, are likely to make pricing a major competitive factor. This could hinder revenue growth and impact profitability.
Byrna is better capitalized and may be able to stay ahead of the competition:
While we believe Byrna is lagging competitors in the market now, Byrna has the financial resources to invest in R&D and potentially meet or beat competitors in the future. They have a stronger financial backing than most of the competitors in the market today.
If the industry does begin to become a larger than expected industry, we would not be surprised to see gun makers begin to embrace LLLs and release their own products. (There is also the possibility for Byrna to partner with gun makers.)
We worry that competitors will converge on similar specs over time and ultimately compete primarily on price thus dragging down topline growth and future profitability. Byrna may be a able to sustain a slight premium due to brand value.
Ammo sales may become a strong recurring revenue stream:
Similar to other products that sell a system and then reusable products that are consumed, Byrna sells ammo that is fairly expensive. It is unclear how frequently owners of LLLs will repurchase ammo, especially considering the rubber bullets are reusable if you are able to recover them.
If Byrna is able to create a strong recurring revenue stream from ammo sales this could also help justify a higher valuation.
It’s important to note that the ammo industry is also very competitive with several other companies offering ammo cheaper than Byrna.
Byrna may become an acquisition target for a gun company:
It is possible that as Byrna grows, a gun manufacturer will acquire Byrna to add as a new product line.
We are true believers in the LLL industry and applaud Byrna for the excellent job they have done in popularizing the product. We made money on our investment in Byrna and will continue to monitor the company for future entry points.
The content provided in this newsletter and any associated communications is for informational purposes only and should not be construed as financial advice. The author is not a registered financial advisor and does not provide personalized investment recommendations. Readers are encouraged to conduct their own research and consult with a qualified financial professional before making any investment decisions. All investments involve risk, and past performance is not indicative of future results. The author shall not be held liable for any losses or damages resulting from reliance on the information presented. The author does not currently hold any position in Byrna at the present time but may purchase or sell shares in the future.