Company: Solesence (formerly Nanophase Technologies)Ticker: $NANXThanks for reading! Subscribe for free to receive new posts and support my work.Price: $2.87Market Cap: $200.9MEV: $206.9MSummary:Solesence formulates SPF makeup products for leading beauty brands and sells chemical ingredients to industrial clients. Since launching their proprietary zinc oxide formula in 2017, they have grown sales from scratch to over $40M in 2024 alone with numerous beauty and product trends painting the picture for continued growth. Despite shares rallying over 300% in the last year, Solesence still trades at ~14x 2025e EPS with significant operating leverage, rapidly growing sales, and an uplisting to a major exchange impending. If the company uplists and maintains its growth trajectory, I believe shares could trade closer to 30x earnings presenting ~115% upside. Company:Solesence is divided into three segments: personal care ingredients, advanced materials, and beauty. Historically, they focused on advanced materials and personal care ingredients, but both were lower margin, subscale, and lumpy. In 2017, they expanded into fully formulated, finished cosmetics products to maintain direct relationships with beauty brands and generate higher margin, steadier, and growing sales. Solesence is their brand name for white label or specially developed, non-nano zinc oxide beauty products which they supply to primarily prestige and masstige brands. They claim that their proprietary formulas prevent “ghosting” (white streaks caused by other zinc oxide products) and offer superior performance to alternatives. Product reviews by users and beauty influencers attest to the brands that partner with Solesence as best in class, and other private label beauty manufacturers claim that Solesence is the industry standard for mineral sunscreens/SPFproducts. As a result of their category leading product and growing segment, the Solesence segment has rapidly grown to over $40M in sales over the last 5 years. Revenue rapidly grew from 2019-2022 but slowed in 2023 due to financial and legal hurdles. Their largest personal ingredients customer BASF SE alleged that at the time Nanophase Technologies selling zinc oxide to its subsidiary Solesence was a breach of their exclusivity agreement, and the legal battle exhausted their balance sheet. At the same time, Solesence was investing in restructuring their operations and expanding capacity to meet demand with stronger margins but needed Capex to do so. With working capital/supply chain issues providing a further drag on cash flow, management diluted shareholders by ~25% around December/January to raise cash, but notably a shareholder/director of over 20 years was a large participant in the raise. That same insider has continued to buy shares on the open market even as recently as last quarter at 4x the price of the former raise. In 2024 the company returned to record revenues and profitability as their largest customer and joint venture partner Colorescience went viral for their mineral SPF products on TikTok in December 2023. For 2024, Colorescience accounted for ~66% of the growth YTD and ~42% in Q3, with growth in smaller customer accounts generating the remainder. Most importantly, gross margins have expanded significantly to record levels of 36% in Q3 with future expansion expected over the next few quarters. With an estimated $13-18M in sales for Q4 that should generate another 2.5M in net income, Nanophase is on track to generate ~7M in net income for FY24. While management has been vague regarding 2025, they’ve indicated that they expect double digit growth despite the difficult comps; I expect they’ll meet the guide given their historical conservatism and significant catalysts for growth. Growth Drivers for 2025:Largest Customer Likely to Continue Growth: While their largest customer and JV partner Colorescience went viral on TikTok in December of 2023, their Amazon sales show that Colorescience’s sales have stabilized and grown since, demonstrating the quality of Solesence’s formulas and eliminating fad risk. Colorescience consistently ranks at the top in “best mineral sunscreens” by the likes of top beauty websites and Colorescience themselves appear to be very optimistic for future growth based on hirings. Solesence management has mentioned that they’ve left orders unfulfilled due to capacity/WC constraints, so I expect reorders and continued brand growth to fuel growth in the Colorescience account which currently represents 34% of Solesence sales in the last 9 months. Growth in new and smaller customers: Management has stated that they’ve continued to onboard new brands, and their customer concentration supports that. As these customers increase orders and grow, Solesence should be able to layer on additional revenue in 2025. Furthermore, with a stronger margin structure and increased capacity, management mentioned that they want to expand beyond premium companies and into middle end “masstige” beauty brands. While these companies would be slightly dilutive in terms of margins, they would still be profitable and would help propel the company beyond the 100M+ revenue range given the larger account sizes. Management has indicated that they plan to focus on masstige brands in the later parts of 2025, and even slight progress on this front could lead to a much stronger 2H. The Rise of SPF Makeup: The popularity of SPF makeup products such as tinted SPF has soared in recent years as consumers have become increasingly aware of sun damage, and the trend is continuing into 2025 according to search trends and industry reports. A sunscreen journal reported that searches for tinted SPF products rose by 84% YoY, and SPF foundations saw a 23% increase in search interest. Given that a majority of Solesence’s sales come from SPF makeup products, not regular sunscreen, these industry trends should be significant tailwinds for Solesence as new players seek to enter the category without heavy investment. Continued growth in mineral sunscreens: Zinc oxide sunscreens have been accelerating in popularity ever since the FDA labeled it as a “safe” ingredient versus alternative chemicals. With the shift towards healthier skincare, this led to zinc oxide rapidly gaining share over competing beauty products due to its clean label and skin restoration abilities. This trend shows no sign of stopping, and mineral sunscreens are projected to continue growth into 2030. Market and Competition:The zinc oxide market is highly competitive, but competitors primarily sell their products as an ingredient to multiple industries. Solesence claims to be the only producer of zinc oxide who then manufactures it into fully finished formulated beauty products. Their formula is currently one of the best in the market, and while that may not be the case forever, it took them decades and 10s of millions of dollars of research and development to reach their current position, and I don’t expect it to be lost overnight. Furthermore, launching proprietary SPF formula often requires FDA approval, which typically takes 1-3 years. Any existing customer seeking to switch producers would have to risk product performance/satisfaction and potentially invest multiple years in research and development. In terms of the SPF/sunscreen category, there is significant competition, but competitors delve into different niches/formulas. Solesence leads the mineral-based/zinc oxide formulas category, but there is competition. Most of Solesence’s end markets are growing from mid-single digits to low double digits.Catalysts:Uplisting: Management has repeatedly said that they’re waiting for a string of strong operating results before uplisting and has recently shifted to profitability while growing double digits. Furthermore, in the last month they changed the company’s name and updated the investor relations page. Considering they didn’t do either for the last major financing, I expect this is most likely preparation for an uplisting to a major exchange. Guidance: Management has provided visibility into a strong Q4 which should deliver revenues of ~15M, an 87% increase YoY. While I don’t expect management to put out an explicit guide, even pointing to double-digit growth should convince the market that Q3/Q4 numbers can be annualized, allowing shares to rerate to stronger forward multiple. Overall, there’s a strong set-up with momentum heading into a record Q4, continued earnings growth, and an uplisting.Price Target:*NOLs offset taxes initiallyManagement has vaguely guided the margins and Q4 performance. Furthermore, they’ve outlined double digit growth for 25 and mentioned that OpEx should be relatively flat. There may be a sequential slowdown in Q1 due to a very strong Q4 and seasonality, but I expect sales to reaccelerate into Q2 growth for 2025 to land closer to the 20-30% range versus a low double digit growth rate in 10-15%. Considering that this year will be one of the first times in recent history that management can focus on growth and execution without any financial/legal hurdles, there’s a decent possibility that growth accelerates throughout the year as they continue to build new relationships, and the company beats my estimates.Based on my projections for FY25, fair value for NANX today is likely closer to 30x earnings, given their growth rate and competitive position. Management has indicated that they should be able to issue a rough guide for 2026 in July, at which point the stock could trade on 2026 numbers and go significantly higher. Regardless, the current valuation isn’t stretched whatsoever for an industry leader growing double digits annually. Management and Shareholders:CEO Jess Janowski has led the company for over 15 years and formerly served as CFO. He has overseen Solesence’s impressive turnaround from a chemical producer to a beauty brand. The largest shareholders have been involved with the board for over 20 years and funded the company throughout its history, now owning 73%. Compensation is fairly low, and insider ownership is high at ~75%. Risks:Customer Concentration: Solesence’s largest customer Colorescience has doubled in customer concentration to ~1/3rd of sales. They continue to onboard new customers, and the odds of Colorescience leaving are highly unlikely given the level of customer satisfaction and product success. Additionally, Colorescience has worked with Solesence since 2017 and have worked on custom development together since Colorescience was just a small brand. However, a slowdown in Colorescience’s account is a risk.Tariffs: A significant portion of Solesence’s ingredients come from China, but management has stated that they should be able to adjust to tariffs with just a slight impact on margins. Industry Shifts: If the industry shifts away from zinc oxide mineral sunscreens due to a new technology, or the FDA discovers dangerous zinc oxide properties, Solesence would be in a bad position. I have not seen any news regarding this; however, it is something to watch. Dilution: I imagine that the uplisting will come with a capital raise, however, it’s unlikely Solesence needs a significant amount of capital given their low CapEx projections. Conclusion: Despite the runup, Solesence is still trading at ~14x earnings for a differentiated industry leader growing at mid double digits annually with a rapidly growing TAM to expand into. Disclaimer:I own shares. This post reflects my own thoughts only and should not be used as a basis for your own financial decisions. I am not a registered financial advisor and this is not financial advice.Thanks for reading! Subscribe for free to receive new posts and support my work.