Back in late September, I wrote here that small-cap beverage company New Age Beverages (NASDAQ:NBEV) looked like a potential multi-bagger. But, I also cautioned that four big risks could challenge that multi-bagger thesis. Ultimately, I labeled NBEV stock as a high-risk, high-reward investment.
Fast forward two months. The “high-risk” part has won out so far. NBEV stock has lost about 30% of its value.The culprit? Mixed third quarter numbers. While New Age Beverages did show off huge revenue growth in the quarter, expenses grew by much more than sales. Yet again, the company wasn’t profitable, and this lack of profitability is starting to concern investors in a big way.
After considering the third quarter print, I’ve slightly changed my thesis on NBEV stock. Before, I saw NBEV stock as a high-risk, high-reward investment, where the reward part outweighed the risk part. Now, profitability concerns have made me less optimistic. I see NBEV stock as a high-risk, high-reward investment, where the potential risks and rewards offset one another.
Sure, NBEV stock could still be a multi-bagger. But now I have less conviction in that happening any time soon than I did two months ago.
Relevant Products Gaining More Distribution
Zooming out, New Age Beverages stock still has multi-bagger potential, despite its late 2019 sell-off.
The core ideas behind the multi-bagger bull thesis are simple. New Age Beverages has a very relevant product portfolio, comprised of health-oriented and organic beverages that consumers are increasingly demanding today as they become more health-conscious and eco-friendly. At the same time, that very relevant product portfolio is finally gaining national distribution, as the company has landed big partnerships with the likes of Circle K, 7-Eleven and Walmart (NYSE:WMT). This dynamic alone — relevant products gaining more distribution — should power healthy revenue growth at New Age Beverages for the next few years.
On top of all that, New Age Beverages also has a CBD catalyst, as the company is in the early stages of rolling out CBD-infused beverages in multiple international markets. This catalyst is a wild-card. But, if New Age does successfully turn into a relevant player in the CBD beverage market, then that will undoubtedly add big growth to the top-line.
Big picture — New Age Beverages has multiple catalysts on the horizon, the sum of which should power healthy revenue growth over the next few years. All management needs to do in order to generate sizable profits, then, is sustain 60%-plus gross margins (they are already there) and manage expenses lower.
If they do that, this company could produce 75 cents in EPS by fiscal 2025. Based on a consumer discretionary average 20-times forward multiple, that implies a 2024 price target for NBEV stock of $15 — more than seven-fold the current price tag.
Risks are Bigger Than Ever
Although the multi-bagger thesis for NBEV stock remains alive, the risks surrounding this stock are more apparent than ever before.
The biggest risk for New Age Beverages is profitability, or lack thereof. Sure, the company is growing sales by leaps and bounds today (basically 400%-plus revenue growth all year long). But, that big growth is being driven by even bigger expense growth (700%-plus operating expense growth all year long). This is nothing new for New Age Beverages. In both 2017 and 2018, expense increases also dramatically outpaced revenue growth.
This dynamic makes complete sense if you consider the competitive landscape in which New Age operates. The beverage market is a very tough one, with fickle demand and very little customer loyalty. Sure, New Age’s beverage portfolio has huge upside potential given its composition. But, the drinks still may not stand out in the crowded functional drink market. If they don’t stand out, New Age Beverages will have to spend more to get them to stand out. That’s exactly what has been going on. New Age’s drinks are standing out, but largely because the beverage maker is paying up for them to stand out.
The competitive dynamic in this segment of the fast-moving CPG brands won’t change anytime soon. Thus, it’s unlikely that New Age’s problem of having to spend big to grow big will change anytime soon, either. Instead, what’s far more likely is that New Age’s expenses continue to run higher alongside revenues.
That’s a problem. Gross margins are above 60%, which is already high for a soft beverage company (average gross margins in the industry are 56%). So, there’s not much more firepower on the gross margin expansion front. Yet, the company is still unprofitable today. So, in order to drive a profit, New Age needs positive operating leverage.
That positive operating leverage may be hard to come by. If so, then NBEV stock will remain weak.
Bottom Line on NBEV Stock
NBEV stock remains a high-risk, high-reward investment, where the potential risks are rising and the potential rewards are becoming less visible. Yes, shares could rise seven-fold in the long run. But, the likelihood of that happening is becoming smaller and smaller as profitability issues become more and more glaring.
So long as these profitability issues hang around, NBEV stock will remain lower for longer.
As of this writing, Luke Lango was long WMT.