Electric Vehicles Will Shrink ICE Aftermarket Demand And Compress Margins

Key Takeaways

• Reliance on ICE aftermarket parts and limited EV diversification make Holley vulnerable to regulatory shifts, demographic changes, and evolving automotive trends.
  
• Rising compliance, inflation, and competition threaten profitability and may drive prolonged margin compression and stagnating earnings.
  
• Strong product innovation, operational efficiency, and e-commerce growth are driving sustained revenue gains and margin expansion despite industry cost pressures.

Catalysts

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

• The accelerating adoption of electric vehicles and the shift away from internal combustion engines threaten to fundamentally undermine Holley's long-term addressable market, as its core business remains heavily dependent on ICE aftermarket parts, ultimately constraining future revenue growth opportunities.
  
• Declining automotive car culture engagement among younger generations and shifting demographics are expected to shrink Holley's future customer base, which poses long-term headwinds to both top-line sales and customer lifetime value.
  
• Increasing government regulations and incentives intended to curb greenhouse gas emissions are likely to lead to future restrictions or higher compliance costs related to ICE vehicle modification and aftermarket parts, resulting in incremental cost pressures and potential declines in net margins.
  
• Despite current tariff mitigation successes, sustained cost inflation and ongoing wage pressure in the auto components sector could outpace Holley's ability to raise prices or drive further efficiencies, leading to gradual margin compression and stagnating EBITDA over the long term.
  
• The company's limited diversification into EV-related performance markets and persistent reliance on a maturing enthusiast segment expose Holley to competitive risk from both large automotive suppliers entering direct-to-consumer channels and emerging specialty brands, likely exacerbating market share losses and undercutting future earnings potential.

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 2.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -5.1% today to 11.4% in 3 years time.
• The bearish analysts expect earnings to reach $72.4 million (and earnings per share of $0.61) by about August 2028, up from $-30.4 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 7.0x on those 2028 earnings, up from -12.3x today. This future PE is lower than the current PE for the US Auto Components industry at 15.0x.
• Analysts expect the number of shares outstanding to grow by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.74%, as per the Simply Wall St company report.

Holley Future Earnings Per Share Growth

Risks

• Holley's core business is showing sustained growth across all divisions, with 3.9% revenue growth and expansion in both the direct-to-consumer and business-to-business channels, which points to robust underlying demand and strengthens prospects for continued revenue and earnings momentum.
  
• Holley's successful tariff mitigation efforts-including supplier diversification, strategic sourcing, and targeted pricing actions-are expected to more than offset $15 million in tariff costs through 2026, protecting both free cash flow and gross margins, and demonstrating resilience against industry cost pressures.
  
• Product innovation and brand portfolio management are consistently driving incremental revenue, as evidenced by $10.8 million in quarterly gains from new product launches and pricing-suggesting sustained potential for top-line growth and margin expansion.
  
• The company's growing direct-to-consumer e-commerce platform and accelerating presence on third-party marketplaces, such as Amazon and eBay, have generated high double-digit sales growth and improved overall gross margins, supporting long-term earnings stability as retail trends evolve.
  
• Management is executing a strategic framework focused on operational efficiency, disciplined capital allocation, international market expansion, and M&A, enabling increased free cash flow, improved leverage ratios, and the capacity to invest in future revenue drivers-potentially supporting longer-term share price appreciation.

Valuation

• The assumed bearish price target for Holley is $3.0, 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 $6.0, and the most bearish reporting a price target of just $3.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $637.6 million, earnings will come to $72.4 million, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 11.7%.
  
• Given the current share price of $3.14, the bearish analyst price target of $3.0 is 4.7% lower. 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.