Electric Vehicle Expansion Will Undermine Combustion Engines But Offer Hope

Key Takeaways

• The shift toward electric vehicles and changing consumer preferences threaten long-term demand and market size for Holley's traditional performance products.
  
• Regulatory pressures and economic uncertainty could undermine profitability and render key products less viable, increasing revenue and earnings volatility.
  
• Heavy reliance on traditional markets, exposure to tariffs, and financial vulnerability heighten risks amid shifting consumer trends and slow expansion into electric vehicle aftermarket.

Catalysts

Designs, manufactures, and distributes automotive aftermarket products to car and truck enthusiasts primarily in the United States, Canada, and Europe.

• While Holley is showing early signs of core revenue growth and stronger gross margins through operational improvements and omnichannel expansion, the acceleration of electric vehicle adoption globally threatens to erode long-term demand for the company's core internal combustion engine performance products, potentially constraining revenue growth as the future vehicle population shifts.
  
• Despite ongoing success in leveraging enthusiast and DIY culture-evidenced by strong engagement on digital platforms and expanding direct-to-consumer and third-party marketplace sales-there is increasing regulatory pressure on emissions and noise in major markets, which could make a significant portion of Holley's product catalog less viable or even illegal for street use, putting long-term pressure on both revenue and net margins.
  
• Although Holley continues to expand its product portfolio and innovate with new launches across domestic muscle, import, and safety segments, the ongoing consumer shift toward ride-sharing, urban mobility, and declining vehicle ownership among younger generations may fundamentally reduce the company's addressable market, impacting future volume and long-term revenue potential.
  
• While operational efficiencies and cost savings-including proactive inventory management and supply chain optimization-are helping to protect margins in the face of headwinds such as tariffs, the company remains highly exposed to further raw material inflation and supply chain volatility, which may undermine profitability if disruptions intensify.
  
• Despite outperformance in direct-to-consumer channels and growing B2B partnerships, Holley's high dependency on discretionary consumer spending for aftermarket vehicle upgrades-at a time when economic uncertainty looms and younger buyers show less interest in car ownership-creates greater risk of earnings and cash flow volatility in an economic downturn.

Holley Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Holley compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Holley's revenue will grow by 4.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.0% today to 10.6% in 3 years time.
• The bearish analysts expect earnings to reach $72.6 million (and earnings per share of $0.6) by about July 2028, up from $-24.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.2x on those 2028 earnings, up from -10.7x today. This future PE is lower than the current PE for the US Auto Components industry at 14.4x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Holley Future Earnings Per Share Growth

Risks

• Sustained macroeconomic uncertainty and weakening consumer sentiment, as reflected in declining consumer confidence indices, pose a significant risk to discretionary spending on automotive aftermarket parts and could result in stagnant or lower revenues for Holley.
  
• The volatile and escalating tariff environment, with ongoing changes in U.S. trade policy and lack of clarity on long-term exposure, increases raw material costs and operational complexity, putting downward pressure on gross margins and potentially eroding profitability.
  
• Rising prices due to tariff-related cost pass-throughs and strategic price hikes, while necessary, risk negatively impacting volume growth as consumers become more price sensitive, which can offset potential gains in net sales and reduce future earnings.
  
• Holley's high dependency on internal combustion engine platforms, combined with slow expansion into the electric vehicle aftermarket space, exposes the company to product obsolescence and revenue decline as secular trends increasingly favor electric and alternative fuel vehicles.
  
• Elevated net leverage, negative free cash flow in the quarter, and reliance on ongoing operational improvements create financial vulnerability; any deterioration in sales or margin conditions could compromise the ability to meet debt obligations and maintain healthy earnings.

Valuation

• The assumed bearish price target for Holley is $2.25, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Holley's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.0, and the most bearish reporting a price target of just $2.25.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $687.6 million, earnings will come to $72.6 million, and it would be trading on a PE ratio of 5.2x, assuming you use a discount rate of 11.6%.
• Given the current share price of $2.16, the bearish analyst price target of $2.25 is 4.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.