Yeti Holdings (NYSE:YETI) has been one of the best stocks of 2019. Already this year, Yeti Holdings stock has risen 113%. Among over 1,800 stocks with a current market capitalization over $2 billion, the performance of YETI stock ranks fourth.
Only three biotechs have done better. The performance of Snap Inc (NYSE:SNAP) this year trails that of YETI stock by a tiny amount.
There are two primary reasons for the big gains of Yeti Holdings stock. The first is that, in retrospect, YETI stock simply was too cheap at the end of 2018. The company went public in October – after pulling a planned IPO earlier last year – which proved to be tough timing for a growth stock. Market-wide worries led YETI down as low as $12.40 in December.
Secondly, Yeti has continued to grow nicely. Its fourth-quarter earnings, reported in February, beat expectations, leading Yeti Holdings stock higher. The company’s 2019 adjusted earnings per share guidance of $0.99-$1.04 suggests that investors could have owned YETI in December for roughly 12 times its expected 2019 EPS. That multiple is far too conservative for a growth stock.
With YETI stock now up over 150% from those lows, however, the question is whether investors are pricing in too much growth. Sales of the company’s coolers are slowing, while its margins might be nearing a ceiling. Luke Lango made a strong case for YETI stock this week, assigning a price target in the high 30s. Given the risks facing the company, however, at $31.50, YETI might need to take a breather.
Why YETI Stock Has Doubled
The main worry about YETI, going back to 2016, when it first filed for an IPO, is that the consumer-products business is a tough one. The growth of high-priced niche products stall out rather quickly. Investors no doubt had in mind the travails of fallen angels like GoPro (NASDAQ:GPRO) and Fitbit (NYSE:FIT). IP camera maker Arlo Technologies (NYSE:ARLO), which also launched an IPO in 2018, has plunged as well.
But Yeti has eased those worries with its recent performance. In Q3, its revenue rose 7% year-over-year, while its adjusted net income climbed 81%. Its revenue growth accelerated sharply in Q4, as its sales rose an impressive 19% YoY. Its strong gross margin performance – including a massive 6.9 percentage point expansion YoY in Q4 – shows that the company isn’t cutting prices to drive its sales. The increase in the company’s gross margins indicates that its profit can rise going forward.
Indeed, the company’s 2019 guidance looks solid. YETI predicts that its sales will rise another 11.5%-13% in 2019. Sales of its coolers are slowing, but drinkware products now generate the majority of its sales. And Yeti’s DTC (direct-to-consumer) channel is rapidly expanding; its DTC sales increased 48% last year, while its wholesale revenue rose just 10%. Since no middlemen are involved in DTC, sales made via that channel improve the company’s margins.
As a result, YETI’s adjusted EPS is expected to rise 18%-24% in 2019, excluding the impact of an unusually low tax rate in 2018. Double-digit-percentage revenue growth and margin expansion suggest the company’s growth outlook is intact. Combined, those trends show why the valuation of YETI stock in December was such an opportunity.
Is YETI Stock Too Expensive?
Of course, the valuation of Yeti Holdings stock now is very different. And there’s a possibility YETI may have run too far. Analysts seem to believe so: the average Street price target on YETI stock now is $30.70, below the current price of $31.56. The Street may need some time to catch up, and another strong earnings report could cause analysts to raise their targets on Yeti Holdings stock. But for now, analysts think the end of the run is nearing.
And there are fundamental reasons to be cautious about the shares. Yeti’s own long-term targets suggest that its adjusted EBITDA margins will be 19%-22%. The midpoint of its 2019 guidance projects those margins will reach 19.6% this year. On the bottom line, growth is likely to slow.
On the top line, meanwhile, there are still worries about market saturation. Any cyclical weakness could hit demand for Yeti’s higher-priced products ; that was a key reason for the decline of YETI stock back in December.
The rally of Yeti Holdings stock to this point has been well-deserved. The company has performed well, and investors who spotted the opportunity late last year have been amply rewarded. From here, however, advancing might be tougher for YETI. The company will grow further, but investors clearly have caught on to the story.
As of this writing, Vince Martin has no positions in any securities mentioned.