Executive Summary / Key Takeaways

• XPEL is executing a strategic pivot from distributor-dependent to direct-market control across APAC, with the September 2025 China acquisition (76% stake) representing the capstone of a multi-year transformation that will unlock approximately $10 million in annual operating income once fully integrated.
• The company is targeting a 10-percentage-point gross margin expansion to 52-54% by 2028 through a $75-150 million manufacturing and supply chain investment, a move that would elevate operating margins into the mid-20s and fundamentally reshape the earnings power of the business.
• Dealership services have emerged as a structural growth engine, growing double-digits despite macro headwinds, with July 2025 posting an all-time record—this channel is more correlated to inventory levels than sales, positioning XPEL to benefit as new vehicle supply normalizes after years of volatility.
• New product launches (windshield protection film, colored PPF, architectural films) are gaining traction and expanding the addressable market, with windshield film already generating $5.8 million in nine-month revenue and colored films representing a potential TAM expander in dealership and OEM channels.
• The investment thesis hinges on execution risk: while the direct model and margin expansion offer substantial upside, XPEL faces concentrated China exposure (regulatory, currency, and operational risks), volatile OEM partnerships, and macro headwinds that could pressure near-term results despite the long-term strategic logic.

Setting the Scene: From Software Startup to Integrated Protection Platform

XPEL, Inc. began in 2003 as a Nevada-incorporated software company designing vehicle patterns for cut-to-fit protective films, a heritage that still powers its competitive moat today. The 2007 expansion into automotive surface and paint protection film (PPF) products transformed XPEL from a pattern provider into a full-stack protection platform, serving luxury car enthusiasts through independent installers before systematically capturing new car dealerships and OEMs. This evolution from software-enabled product sales to integrated manufacturing, distribution, and installation services defines XPEL's current positioning in the $980 million U.S. automotive wrap films market, projected to reach $1.8 billion by 2035.

The company's strategic trajectory shifted decisively toward direct market control beginning in 2024, with distributor acquisitions in Japan, Thailand, and India. This strategy culminated on September 9, 2025, with the acquisition of XPEL's exclusive Chinese distributor for just under $53 million, securing a 76% interest in the entity and adding approximately $22 million in inventory. China represents the world's largest automotive market, and direct control eliminates margin leakage while enabling XPEL to capture the full economics of its products. The APAC region now operates under XPEL's direct model, creating a blueprint for margin expansion that management aims to replicate through manufacturing investments.

XPEL generates revenue through four distinct but synergistic streams: product sales (PPF, window films, other accessories), software access fees (DAP), installation labor (company-owned centers and dealership services), and training. This diversified model creates multiple touchpoints with customers while the DAP software platform—still the industry's gold standard for pattern design—drives loyalty and efficiency across the installer network. The company now holds approximately 35-40% share of the U.S. PPF market, competing against industrial giants like 3M (MMM), Eastman Chemical (EMN) with its LLumar and SunTek brands, and Avery Dennison (AVY).

Technology, Products, and Strategic Differentiation

XPEL's Design Access Program (DAP) software remains the company's original and most durable moat, generating $6.5 million in nine-month 2025 revenue through subscription fees and cutbank credits. While management acknowledges DAP has taken a "back seat" to other initiatives, ongoing development focuses on operational components—work orders, scheduling, commissions, warranty submissions—and a newly launched companion mobile app. DAP generates high-margin recurring revenue and locks installers into XPEL's ecosystem, creating switching costs that competitors cannot easily replicate. The software makes customers more efficient, which ultimately sells more products, reinforcing a virtuous cycle that has taken two decades to build.

Product innovation is accelerating across multiple fronts. The windshield protection film launched in Q4 2024 generated $5.8 million in nine-month 2025 revenue, representing 7.8% of window film sales. Management plans consumer marketing later in 2025 to unlock its potential as a "gateway product" that appeals to consumers outside XPEL's traditional ecosystem. Colored paint protection films, launched in Q2 2025, represent a "TAM expander" that could drive substantial growth if traction builds in dealership and OEM channels. Architectural window films and surface protection films for countertops extend the "protect everything" mantra beyond automotive, diversifying revenue streams.

The most significant strategic initiative is the $75-150 million manufacturing and supply chain investment targeting a 10-percentage-point gross margin improvement to 52-54% by 2028. This isn't merely a cost-reduction exercise; it's a fundamental repositioning to become the highest-quality, lowest-cost producer in the industry. Current gross margins of 41.9% trail the company's potential, and every point of margin expansion flows directly to operating leverage. The investment will gain control over the end-to-end manufacturing process, reducing dependency on third-party suppliers and insulating XPEL from the "unfavorable price increases that were out of line with the market" that pressured Q3 2025 margins by 170 basis points.

Financial Performance & Segment Dynamics

XPEL's Q3 2025 results demonstrate the tension between strategic investment and near-term profitability. Revenue reached a record $125.4 million, up 11.1% year-over-year, with the U.S. region delivering 11.1% growth to $71.7 million. The EU region surged 28.8% to $16.5 million, benefiting from easier comparisons after prior-year headwinds. However, EBITDA declined 8.1% to $19.9 million (15.9% margin) and net income fell 11.8% to $13.1 million (10.5% margin), reflecting the front-loaded costs of the direct model transformation.

Segment performance reveals the underlying health of the business. Paint protection film revenue grew 4.9% in Q3 to $63.5 million, representing 50.7% of consolidated revenue, while window film accelerated 22.2% to $27.6 million. The installation labor segment, encompassing dealership services and OEM business, increased 16.9% to $22.1 million. Window film and installation services carry different margin profiles than PPF, and the growth in higher-value installation work—particularly dealership services—positions XPEL for more stable, recurring revenue. The dealership channel's correlation to inventory rather than sales provides a natural hedge against consumer demand volatility.

Margin pressure in Q3 stemmed from two primary sources: "unfavorable price increases that were out of line with the market" and the China acquisition impact. The China transaction requires XPEL to sell through acquired inventory, recognizing only the former distributor's margin portion until that inventory turns. This created a 170-basis-point gross margin headwind that management expects to reverse starting in Q4 2025 and into Q1 2026. Additionally, SG&A expenses are "running hot" due to investments in international channels, with Q3 including $1.3 million in acquisition-related expenses and $0.8 million in bad debt costs.

Cash flow generation remains robust, with Q3 2025 operating cash flow hitting a record $33.2 million compared to $19.6 million in Q3 2024. The company ended the quarter with $64.5 million in cash and $128.2 million available under its credit facility, which was extended to September 2028. This liquidity funds the manufacturing investment without diluting shareholders and provides flexibility for opportunistic acquisitions. The China acquisition added $22 million in inventory that will generate "great cash flow" as it sells through, reducing replacement turn times and total inventory needs.

Outlook, Management Guidance, and Execution Risk

Management's guidance for Q4 2025 revenue of $123-125 million implies full-year 2025 growth of 13-14%, a meaningful acceleration from the 6% growth in 2024. This outlook assumes the China business will be "much more normalized going forward" with supply chain efficiencies and matched sell-in/sell-through dynamics. The company expects "record gross margins for the business at the consolidated level" in Q1 and Q2 2026 as the China inventory headwind dissipates and full margin recognition begins.

The 2028 margin targets—52-54% gross margin and mid-to-high-20s operating margin—represent a transformational step-up in profitability. Achieving these targets requires executing on three fronts: completing the manufacturing investment, realizing the full benefits of direct distribution in China and other APAC markets, and maintaining pricing discipline in a competitive environment. This trajectory suggests EBITDA could more than double from current levels even without aggressive revenue growth, creating substantial operating leverage for shareholders.

SG&A growth is expected to moderate in the second half of 2025 as the heavy lifting of international build-outs concludes. The China acquisition will add approximately $5 million in annual SG&A (including intangible amortization) but contribute roughly $10 million in operating income once full gross margins are realized. This 2:1 benefit-to-cost ratio illustrates the math behind the direct model strategy. Management is also targeting "several million dollars more of corporate cost" savings through vendor optimization and personnel reorganization, partially offsetting the investment burden.

Execution risks are material. The OEM business has "missed expectations" and remains a "drag on results" due to manufacturer disruptions and inconsistent demand spikes that challenge cost management. While the Rivian (RIVN) program shift to a full-body matte wrap and co-marketed referral program aims to stabilize this segment, OEM revenue remains choppy. Additionally, the macro environment is "very tough" for many in the industry, with competitors "pulling back" while XPEL invests, creating near-term margin pressure for long-term share gains.

Risks and Asymmetries

China concentration represents the most significant risk to the investment thesis. XPEL now derives a substantial portion of revenue from China, exposing it to PRC government influence, RMB currency fluctuations, and limitations on profit distribution from the 76%-owned subsidiary. Chinese M&A rules could delay future acquisitions, while regulations on loans and currency conversion may prevent XPEL from efficiently funding operations. The China acquisition's $10 million operating income contribution is essential to the margin expansion story, and any regulatory interference or currency devaluation could materially reduce that benefit. The minority interest structure also creates potential conflicts and litigation risks.

The OEM business's volatility poses another key risk. Despite strong interest globally, bottom-line performance has been inconsistent due to manufacturer-driven demand spikes that disrupt cost structures. The Rivian program changes illustrate this challenge—while the shift to a referral model may improve long-term stability, Q4 2024 OEM revenue declined slightly and remains unpredictable. If major OEM partners delay or cancel programs, XPEL's growth trajectory could suffer.

Macro headwinds and competitive pressure create additional uncertainty. The automotive aftermarket faces affordability challenges, with new car sales still depressed from historical averages and over 25% of consumers carrying negative equity above $10,000. The U.S. dollar's strength "impedes our margin" and reduces revenue growth rates, while tariff environments create "short-term noise" and supply chain complications. Competitors are "pulling back" and seeking "extra margin in other places," potentially sparking price wars that could pressure XPEL's premium positioning.

Forex and supply chain dependencies remain vulnerabilities. Q4 2024 saw a $1.2 million FX monetary transaction loss that impacted EPS by over three cents, and Q3 2025 gross margin faced pressure from supplier price increases. While XPEL's three-country manufacturing footprint mitigates some tariff risk, the company remains exposed to raw material cost inflation and logistics disruptions that could compress margins.

Valuation Context

At $49.18 per share, XPEL trades at 28.9x trailing earnings, 21.1x free cash flow, and 18.3x EBITDA, with an enterprise value of $1.32 billion. These multiples place XPEL at a premium to industrial peers like Eastman Chemical (10.3x earnings, 6.97x EBITDA) and Avery Dennison (20.4x earnings, 11.9x EBITDA), but at a discount to 3M (26.8x earnings, 15.8x EBITDA) on a cash flow basis. This valuation reflects the market's expectation that XPEL's margin expansion and direct model transformation will deliver superior growth relative to diversified chemical conglomerates.

The company's balance sheet strength supports the valuation premium. With $64.5 million in cash, no debt outstanding under its $125 million credit facility, and a debt-to-equity ratio of just 0.09, XPEL has the financial flexibility to fund its $75-150 million manufacturing investment while maintaining capacity for acquisitions or share repurchases. The board's $50 million share repurchase authorization signals management believes the stock is attractive at current levels, though the priority remains investing in the core business.

Relative to peers, XPEL's 41.9% gross margin exceeds 3M's 41.0% and dramatically outpaces Eastman's 22.9% and Avery Dennison's 28.6%. The 13.4% operating margin lags 3M's 24.4% but exceeds Eastman's 9.7% and Avery Dennison's 12.7%. These comparisons highlight XPEL's premium positioning while underscoring the potential upside if management achieves its 2028 margin targets, which would place operating margins on par with 3M's best-in-class levels.

The 1.35 beta indicates higher volatility than the broader market, reflecting XPEL's cyclical exposure and transformation execution risk. However, the 19.0% return on equity and 11.3% return on assets demonstrate efficient capital deployment, while the 2.78 current ratio and 1.20 quick ratio provide ample liquidity cushion.

Conclusion

XPEL stands at an inflection point where strategic investments in direct distribution and manufacturing capacity are poised to fundamentally reshape its earnings power. The China acquisition and broader APAC direct model transformation offer a clear path to $10 million in incremental operating income, while the manufacturing investment targets a 10-percentage-point gross margin expansion that would elevate the business into a new profitability tier. The dealership services channel provides a stable, high-growth foundation that is less susceptible to consumer demand volatility, and new product launches are expanding the addressable market beyond traditional PPF.

The investment thesis ultimately depends on execution. XPEL must successfully integrate its China operations, realize the projected SG&A leverage, and navigate macro headwinds while maintaining pricing discipline in a competitive environment. The OEM business remains a wildcard, and China concentration introduces regulatory and currency risks that could offset margin gains. However, the company's strong balance sheet, robust cash generation, and proven ability to take share in a consolidating industry provide a margin of safety.

For investors, the critical variables to monitor are the pace of margin recovery in Q1/Q2 2026, the trajectory of dealership services growth, and the stabilization of the OEM business. If XPEL delivers on its 2028 targets, the current valuation will appear conservative in hindsight. If execution falters, the premium multiple leaves little room for disappointment. The next 12-18 months will determine whether XPEL's transformation creates a durable competitive moat or proves to be an overreach in a challenging market.