If this were 2011, 2013, 2015 or even 2017, the rise of New Age Beverages (NASDAQ:NBEV) would stand on its own as an outstanding investment opportunity. But it’s 2019, and with the big bull market over, a company that makes coconut watermelon sodas, cold brew coffee, kombucha and tea looks a lot more speculative …
… Especially when you throw marijuana into the mix, which helped NBEV stock surge roughly 350% since mid-September.
Still, NBEV stock has been on a tear recently, even while the rest of the market was running from the bears. Since the Christmas Eve market massacre (which some analysts now call the bear market bottom) shares in NBEV are up 47%, and opened Tuesday at $7.45 per share, with another speculative run expected.
Is it really time to pay 10 times revenue for a company that makes niche drinks?
It’s a New Age
New Age Beverages’ management is led by Brent Willis, who has run private equity-based companies for many years and knows his way around a deal. Deals are what a fast-growing company like New Age are all about, like a distribution agreement for Sunshine Beverages, which makes what it calls “good energy” drinks using ingredients like Clementine oranges, ginger and blueberries.
The biggest deal for New Age, however, came in December, when it bought Morinda Holdings of Utah for $85 million; $75 million of it in cash.
Morinda uses multi-level marketing to get its product into consumers’ hands, which includes its Tahitian noni juice products. Noni juice, derived from a tree native to Southeast Asia, is said to have wide-ranging health benefits and has been re-engineered by Morinda to improve the taste.
Before the deal, Morinda was claiming sales of $500 million but wasn’t sharing its figures publicly. New Age had revenues of $52 million in 2017 and was on pace to only match that in 2018. With Morinda, New Age now claims it will have a run rate of $300 million in sales during 2019, with operations in over 60 countries.
Then there’s marijuana.
Pot helped fuel New Age’s gains in 2018, as it prepared to sell water with cannabidiol (CBD) added to it, which, thanks to the passage of the farm bill, could be on store shelves near you soon.
The New Age Hype
What NBEV stock bulls harp on is the company’s revenue growth and gross profits.
For the first nine months of 2018, New Age had revenues of $38 million, and gross profits of about $7 million. Growing to $300 million would be massive, and the company claims the Morinda deal will provide $10 million in cost and revenue synergies.
The hype train claims you already have a $300 million company, preparing to enter a marijuana market where companies often trade for over five times revenue, and how can you lose?
Well, you can.
Morinda’s health claims may not be all they appear to be, especially if they’re using multi-level marketing. New Age Beverages existing lineup is extremely niche (grapefruit-sage kombucha?). And the idea of putting CBD into sodas sounds, at minimum, speculative, considering the unregulated nature of the CBD industry. As for health benefits, the only actual, FDA-approved treatment, Epidiolex, is for epilepsy, which GW Pharmaceuticals (NASDAQ:GWPH) owns. Any other claim is speculative at best, bogus at worst.
Bottom Line on NBEV Stock
It is often noted that Coca-Cola (NYSE:KO) started life in the 1880s as a patent medicine containing cocaine, which wasn’t removed until the first decade of the 20th century. The fizzy water business, in other words, has a checkered history.
New Age is a hark back to that history. In order to create new niches, and grab new consumers, the company is throwing lots of strange and interesting drinks at people and making some big claims.
If Morinda has a stable business; if New Age Beverages can get out a legit CBD beverage; if it can build its distribution; if it can scale globally … only then is NBEV stock a bargain.
That’s a lot of “ifs.”
Is 2019 really the year you invest in an “if” stock?
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.