What happened

XPEL (XPEL 0.03%) shareholders beat the market by a wide margin last month. Their stock rose 28% compared to a 0.55% uptick in the S&P 500, according to data provided by S&P Global Market Intelligence.

The rally pushed the auto parts supplier's stock to a new high, up over 400% in the past full year.

Three people look at a new car inside a dealership.

Image source: Getty Images.

So what

Investors were thrilled with XPEL's earnings report last month. The company, which sells automotive paint and glass coatings around the world, notched a head-turning 83% sales spike in the first quarter. That boost marked an acceleration over the prior quarter's already elevated 23% increase. "The momentum we saw at the end of last year carried over into 2021 resulting in record top and bottom line performance," CEO Ryan Pape said in a press release. China was the company's best-performing market, but growth came from across geographies and product categories.

The news was even better on the profit side. In fact, adjusted earnings spiked by 256% thanks to the combination of surging sales and modest expense growth. XPEL reported net income of $6.8 million, translating into significant growth over last year's $1.6 million haul.

Now what

There's no telling when this unusually favorable selling environment will end. XPEL has benefited from pent-up demand for vehicle purchases, which were supported by waning COVID-19 restrictions in recent quarters. The U.S. market has surged with help from a massive federal stimulus project, too. These conditions will inevitably worsen as stimulus support fades and as consumer demand returns to more normal patterns.

But XPEL has demonstrated an ability to meet surging demand across its global footprint, which is impressive given supply chain challenges in the world today. It is gaining new customers and improving its operating efficiency, implying expanding earnings power ahead.

Risk factors when investing in this business include its tiny size at just $160 million of annual revenue. In addition, the soaring stock price and elevated valuation make it likely that shareholders will have to endure a few sharp drops, even if XPEL manages to extend its growth momentum deeper into 2021.

These challenges should have investors approaching cautiously when determining whether to buy XPEL stock. Surging gains could easily give way to a period of declines, due to unpredictable swings in consumer spending behavior over the next few quarters.